Four of six members of the MPC voted to cut the rates, while all six voted for a change in the stance.
The Reserve Bank of India Thursday projected an economic growth rate of 7.4 per cent for the next fiscal, up from 7.2 per cent estimated for the current fiscal by Central Statistics Office (CSO).
The last rate cut was announced in August 2017 and was followed by two hikes of 25 bps each previous year.
RBI Governor Shaktikanta Das cut the interest rate by 0.25 percent to 6.25 percent, a move that will lead to reduction of lending rate by banks leading to lower EMI for housing, vehicle loan and corporate borrowers. It was the first policy review by the RBI after appointment of its governor Shaktikanta Das in December past year.
The RBI also eased bank lending restrictions for non-banking finance companies and raised the limit on "collateral free" farm loans in an attempt to boost lending to almost 120 million rural households.
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"Investment activity is recovering but supported mainly by public spending on infrastructure", news agency Reuters reported quoting the MPC. The repo rate cut will lead to a decrease in EMIs on Home Loans, Car Loans and Personal Loans as the banks would likely decrease the interest rates. "The need is to strengthen private investment activity and buttress private consumption", it said. Oil prices and the lagged impact of the recent depreciation of the Indian rupee could be a drag on net exports while slowing global demand could pose headwinds.
"Headline inflation is expected to remain contained below or at its target of 4%".
Other uncertainties flagged by the MPC include uncertain monsoons, volatile vegetable prices, hazy oil price outlook, further heightening of trade tensions and geopolitical uncertainties, the unusual spike in the prices of health and education, and volatile financial markets. This could allow the RBI more elbow room to lower lending rates, eventually bringing down borrowing costs for individuals and corporate houses. He said the central bank will be meeting the heads of banks in the next two to three weeks and assured to take up the matter with the bankers.
The surprise 25 basis points rate cut to 6.25 per cent is a measure to broad base credit growth across all the sectors of the economy that's gathering more steam now, the governor said.
India's central bank on Thursday unexpectedly lowered interest rates and, as anticipated, shifted its stance to "neutral" from "calibrated tightening" to boost a slowing economy after a sharp fall in the inflation rate.