Someone might say it when you've just come back from an adventure or an event that has elements that can be exaggerated in a fun way. For example, if you went on a camping trip near a lake and did some fishing, even if you didn't catch much, they could say this so you can make up a great story about it.
They would say 'now you can tell a fish story' when they think you have a story that can be made more interesting with some exaggeration. Maybe you've just told them a basic account of something that happened, like a small fishing trip where you caught a tiny fish, and they want you to tell it in a more exciting way like fishermen do when they talk about their catches, so they say this.