Ahead of its policy review on February 3, the Reserve Bank of India (RBI) Thursday cut the repo rate at which it lends to commercial banks by 25 basis point from 8 percent to 7.75 percent with immediate effect.

In a statement, the bank Governor Raghuram. G. Rajan said: "In its public interactions, the RBI had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary targets would be met."

He said with this commitment in mind, it has been decided to reduce the policy repo rate (the rate at which RBI lends to commercial banks) under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 percent to 7.75 percent with immediate effect.

Rajan also said the RBI has decided to keep the cash reserve ratio (CRR) of scheduled banks unchanged at four percent of net demand and time liabilities (NDTL). He said the RBI would continue to provide liquidity under overnight repos at 0.25 percent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 percent of NDTL of the banking system through auctions, and continue with daily variable rate repos and reverse repos to smooth liquidity.

Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.75 percent with immediate effect, he said.

According to him, lower than expected inflation has been enabled by the sharper than expected decline in prices of vegetables and fruits since September, ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil.

"Crude prices, barring geo-political shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December. Finally, the government has reiterated its commitment to adhering to its fiscal deficit target," Rajan said. These factors have significantly reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects.

Households' inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009.

"These developments have provided headroom for a shift in the monetary policy stance. It may be recalled that the fifth bi-monthly monetary policy statement of December had stated that if the current inflation momentum and changes in inflation expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle," Rajan said.

The Indian industry has long been demanding for rate cut in the backdrop of high interest rates. 

Industry's pitch for rate cuts and economic reforms had become sharper with factory output registering a negative 4.2 percent growth during October, even as retail inflation eased to a historic low of 4.38 percent in November.

For December, retail inflation stood at 5 percent. WPI inflation was nil for November.

According to official data released Monday, industrial production registered a healthy growth of 3.8 percent during November from a deceleration of 1.3 percent during the corresponding month of 2013.

On Wednesday, Jyotsna Suri, president, industry chamber FICCI had said: "The WPI inflation for December 2014 at 0.11 percent is only a marginal rise over last month.To give a boost to the capex cycle, there is an urgent need for lowering of lending rates. Since inflation is largely under control, we urge the RBI to ease the monetary policy stance."

Recently, Finance Minister Arun Jaitley had sent a clear signal to the apex bank, calling for increasing the flow of funds in the market.

"The credit offtake is slow, infrastructure creation becomes slower, the manufacturers find it difficult to afford costly capital, because it is going to add to each one of their costs. And, therefore, this is one area where each one of us has to be concerned about," the Finance Minister had said at a workshop on 'Make in India' in New Delhi.