Muted growth and subdued inflation prompted the Reserve Bank of India (RBI) on Thursday to lower its key lending rate for commercial banks by 25 basis points (bps) to 6 per cent.
The lower repo, or short-term lending rate for commercial banks, will reduce interest costs on automobile and home loans, thereby giving a push to demand.
The decision was taken by the RBI's Monetary Policy Committee (MPC) at its first monetary policy review of the current fiscal.
"On the basis of an assessment of the current and evolving macroeconomic situation, the MPC decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6 per cent from 6.25 per cent with immediate effect," the RBI said.
"Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the bank rate to 6.25 per cent."
Additionally, the MPC also decided to maintain the "neutral" monetary policy stance.
"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of + or - 2 per cent, while supporting growth," the central bank statement said.
The apex bank noted signs of weakness in domestic investment activity as reflected in a slowdown in production and imports of capital goods.
Consequently, it lowered the country's growth projection for 2019-20 to 7.2 per cent.
Earlier, the second advance estimates for 2018-19 released by the Central Statistics Office (CSO) in February 2019 revised India's real gross domestic product (GDP) growth downwards to 7 per cent, from 7.2 per cent projected in the first advance estimates.
"Domestic economic activity decelerated for the third consecutive quarter in Q3:2018-19 due to a slowdown in consumption, both public and private," the RBI said.
According to the central bank, the inflation path during 2019-20 is likely to be shaped by several factors, including lower food cost and fall in fuel prices, among others.
"Taking into consideration these factors and assuming a normal monsoon in 2019, the path of CPI inflation is revised downwards to 2.4 per cent in Q4:2018-19, 2.9-3.0 per cent in H1 (first half):2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced," the RBI said.
At its final bi-monthly policy review of the last fiscal, in February, the central bank's MPC voted to lower its repo rate by 25 bps to 6.25 per cent.