Auto-makers, however, added that the hike has come at a wrong time for the overall economy.
"It is a good decision but the Rs 5 per litre hike will hurt the consumer and market. We have been saying that diesel prices should be corrected in a staggered manner," Society of Indian Automobile Manufacturers (SIAM) Senior Director Sugato Sen said.
Mahindra & Mahindra Chief Executive (Automotive Division) Pravin Shah said: "This is a much-debated and much-awaited decision. For the auto industry, it is a welcome one as diesel needs to be priced at market value.
"However, for the overall economy it has come at a wrong time. The overall sentiment is weak and this will further add to inflation".
The Cabinet Committee on Political Affairs, headed by Prime Minister Manmohan Singh, this evening decided to raise diesel prices by Rs 5 per litre, excluding VAT (value-added tax).
Diesel in Delhi costs Rs 41.32 a litre and with this hike it will cost Rs 46.95, after considering 12.5 per cent VAT on the hike.
Sen said the hike in diesel price could encourage buyers, who have been deferring purchase, to come back to the market and demand of petrol vehicles could improve.
General Motors India Vice-President P Balendran said: "In the long term when the price difference between petrol and diesel fuels reduces, obviously sales of petrol vehicles will increase. However in the short-term, the diesel price hike will not have any impact on boosting sales as the market continuues to be subdued".
He also welcomed the step saying the auto industry has always been in favor of market-driven price for diesel.