The CRR, the amount of deposits the banks are required to keep with RBI in cash is cut to 5.5% from 6%, this will be effective the fortnight beginning January 28, 2012. The CRR cut will infuse additional Rs 32,000 crore liquidity into the system.
Repo, the rate at which it lends to banks, the RBI kept repo unchanged at 8.5% and reverse repo at 7.5%.
"The growth-inflation balance of the monetary policy stance has now shifted to growth, while at the same time ensuring that inflationary pressures remain contained," RBI governor Duvvuri Subbarao said in his policy statement.
"Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate," RBI Governor D Subbarao said while unveiling the third quarterly monetary policy review.
The Reserve Bank said the policy actions are meant to "mitigate downside risks to growth" and anchor inflationary expectations.
Since March 2010, the RBI has hiked rates 13 times to fight inflation. India's headline inflation eased by 7.47% for the month of December 2011 lowest in two years.
Reacting positively to the news, stock market BSE surged by 200 points and NSE jumping to 90 points.