RBI governor Sanjay Malhotra said the bank was keeping its policy stance “neutral”, which would open more space to support growth, signalling further rate cuts.
Investment growth and urban consumption in the world’s fastest growing major economy have been flagging. Corporate profits have also shrunk in the first half of this financial year.
But moderating inflation, an increase in rural demand and good agricultural output will help growth, said Mr Malhotra.
The rate cut could lead to marginally lower mortgage and credit card interest rates as well as cheaper borrowing costs for companies.
The central bank’s rate reduction follows a range of measures previously announced, including an injection of $18bn (£14.48bn) into the domestic banking system, to ease a cash shortage in the economy.
It had also cut the cash reserve ratio – or the reserves commercial banks need to maintain with the RBI – by half a percent in December.
The RBI’s rate move follows the Union Budget’s $12bn tax cut for the struggling middle class.
Despite this, Mr Modi’s government aims to curb spending to reduce the budget deficit. With limited room for fiscal stimulus, economists expect the central bank to cut rates further by 0.5% –1% to support growth, according to various estimates.
However, global uncertainties due to US President Donald Trump’s tariff war, an outflow of foreign investor money and a depreciating currency – which could further weaken if rates come down – have complicated the RBI’s task.
The Indian rupee is trading near record lows due to heavy foreign investor outflows from stock markets in recent months.
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