In the first interest rate cut in 18 months, the RBI Thursday shed its hawkish stance to reduce policy rates in the maiden policy meeting under new Governor Shaktikanta Das, a move that may make home and other loans cheaper.
Coming just months ahead of the general elections, the move will help boost lending and support the government's efforts to boost a slowing economy after it last week unveiled an expansionary budget which included a Rs 75,000 crore cash dole to small farmers and income tax rebate to the middle class.
The Reserve Bank of India's six-member monetary policy committee (MPC) cut the repo rate by 25 basis points to 6.25 per cent as inflation continues to remain benign.
While four out of the six members, including Das, voted for a reduction in interest rate, all the six members unanimously favoured switch in stance to 'neutral' from 'calibrated tightening' adopted in October.
Emboldened by a slowdown in inflation which fell to 18-month low of 2.19 per cent in December and is expected to be in the range of 3.2-3.4 per cent in April-September to 3.2-3.4 per cent - lower than previous RBI prediction of 3.8-4.2 per cent range, Das-led MPC weighed more concern about economic growth risks, paving the way for more rate cuts.
Besides repo rate, reverse repo was reduced to 6 per cent from 6.25 per cent.
Repo rate is the rate at which commercial banks borrow money from the RBI; while reverse repo rate is the rate at which RBI collects money from banks.
Das, who unlike his predecessor Urjit Patel is seen more amenable to government demands for boosting credit growth, said it was "vital to act decisively and in a timely manner to address the objective of growth once price stability as defined (in RBI's inflation-targeting mandate) is achieved."
"Investment activity is recovering, but supported mainly by public spending on infrastructure," the MPC said in a statement. "The need is to strengthen private investment activity and buttress private consumption."