This is the fifth straight rate cut by the central bank in as many policy reviews in 2019, and takes the total quantum of reductions to 1.35 per cent. The cumulative policy repo rate has been reduced by 110 bps during February-August 2019.
The RBI monetary policy committee, which has reduced the rate at which the RBI lends money to commercial banks to 5.15 per cent, said recent measures announced by the government were likely to help strengthen private consumption and spur private investment activity. The market is expecting the RBI to cut interest rates yet again, after last monetary policy's unexpected 35 basis point cut.
The MPC noted that "accommodative stance will be maintained as long as it is necessary to revive growth while ensuring that inflation remains within the target", leaving room for more rate cuts in future.
The GDP growth forecast for the current fiscal has lowered to 6.1 per cent from 6.9 per cent earlier. The repo rate was lowered to 5.5 per cent in October 2002.
"The recent volatility in crude oil prices and the fiscal measures announced by the government will have an impact on inflation in the medium-term and the fiscal deficit", said Shanti Ekambaram, president of consumer banking at Kotak Mahindra Bank.
Any scope for another rate cut?
The repo rate now stands at 5.15 per cent.
Mr Das said that the central bank has acted promptly and swiftly on the PMC Bank issue. A majority of the 39 economists in a Bloomberg survey predicted the move, while the rest forecast cuts ranging from 15 basis points to 40 basis points.
The RBI is expected to continue its accommodative stance.
Friday's cut takes the benchmark rate to the lowest in nearly a decade and follows a number of fiscal steps taken by the government recently to spur growth, including a surprise US$20 billion reduction in corporate taxes.
The further reduction of repo rate will not only bring down the lending rates but also incentivise investment and boost consumption, he said.
Economists also said the policy transmission process could improve after the RBI mandated banks to link all fresh loans to an external benchmark like the repo rate or the rate on short-term treasury bills since the start of this month.