"Until further orders, oil marketing companies (OMCs) can increase it (diesel price) by 40-50 paise (per litre) every month," Moily told mediapersons here.
State-run refiners currently sell diesel at a loss of Rs.10.80 per litre.
The government had Jan 17 permitted the OMCs to set diesel prices in a move that could help the government reduce its budget-busting subsidy bill.
OMCs followed it up next day with a price hike of 45 paise per litre.
Diesel currently costs Rs.47.65 in Delhi, Rs.51.51 in Kolkata, Rs.53.71 in Mumbai and Rs.50.68 in Chennai.
Moily said he had heard of states like Gujarat and Tamil Nadu asking their public transport fleet to refuel at petrol pumps instead of the current practice of buying diesel from oil firms so as to save on the price difference.
"We need to look into that (matter). I have also heard about it," Moily said.
He added that instead of buses being asked to refuel at petrol pumps, the state governments should reduce high local sales tax or value added tax on diesel to cut prices.
The government had decided to charge bulk diesel consumers like defence, railways and state transport companies the market price -- almost Rs.10 a litre more than the retail selling rate -- to save an estimated Rs.12,907 crore in annual subsidy.