Encouraged by softening inflation and fiscal consolidation roadmap by the government, RBI today slashed key policy (repo) rate by 0.25 per cent to 7.5 per cent, the second such surprise rate cut outside regular policy review in less than two months.
It has been decided to "reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect," RBI Governor Raghuram Rajan said in a statement.
The cut in the policy rate by RBI will help in lowering interest rate for individual and corporate borrowers.
It will thus make home, auto and corporate loans cheaper.
However, cash reserve ratio (percentage of deposits kept in government securities) has been left unchanged at 4 per cent.
Rajan, in the statement, said 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.
"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," he said.
Wholesale inflation for January, declined to a five-and-a-half year low of (-)0.39 per cent on falling prices of manufactured and fuel items, even though prices of food articles remained high.
Inflation measured by the wholesale price index (WPI) was at 0.11 per cent in December. The data for November was revised downwards to (-)0.17 per cent, from the provisional estimate of zero.
However, food inflation witnessed a rising trend in January and scaled a six month high of eight per cent, according to the government data released on Monday.
Besides, inflation in pulses, vegetables and cereals was higher in January over the previous month.