Mumbai: In a surprise move, the Reserve Bank of India on Wednesday cut repo rate by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect. This is the second rate cut in the past two months.
The cut in repo rate is likely to make home loans cheaper.
The cash reserve ratio (CRR) was kept unchanged at 4 per cent.
"Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation," RBI Governor Raghuram Rajan said in a statement.
The cut comes just days after the government and the RBI agreed to formally adopt inflation targeting, though the central bank introduced its own targets a year ago.
Analysts said the RBI's rate cut appeared to give a seal of approval for the government 2015-16 budget, and its pledge to exercise fiscal responsibility, while taking an additional year to meet a fiscal deficit target of 3 per cent of gross domestic product.
"Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 per cent in the second half. The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative," Rajan said.
The statement noted that the rupee's relative strength also added to disinflationary pressures, although Rajan said the RBI does not target exchange rates and does not have a target for currency reserves.
Indian inflation has moderated sharply as oil prices slumped since last year. In January, consumer prices rose an annual 5.11 per cent, well within the inflation target agreed by the government and RBI.
In a document dated February 20 but published on the ministry website on Monday, both sides agreed to set a consumer inflation target of 4 per cent, with a band of plus or minus 2 percentage points, from the financial year ending in March 2017.
The RBI had first lowered interest rates this year on January 15, in a similarly unexpected move. Both rate cuts took place outside of the central bank's scheduled policy review meetings.
(With additional information from Reuters)