The Reserve Bank of India (RBI), as was largely expected cut the repo rate by 25 basis points in its Monetary policy meet, while holding the Cash Reserve Ratio (CRR) requirements for banks unchanged.
Repo rates are interest rates at which the RBI lends money to banks in the country. Any cut in this rate, tends to lower interest rates in the economy, including deposit and lending rates.
Inflation for the month of Feb 2016, hit a 4-month low of 5.2 per cent, as against 5.69 per cent.
On the other hand industrial growth continued to be sluggish, with calls of a 50 basis points cut today, getting even louder.
While there was an outside chance of a 50 basis cut, the RBI would have been worried of CPI inflation edging up, which may have prompted the country's central bank to keep rates at these levels.
The central bank clearly continues to remain worried over upside risks to inflation.
"There are uncertainties surrounding this inflation path emanating from recent unseasonal rains, the likely spatial and temporal distribution of monsoon, the low reservoir levels by historical averages, and the strength of the recent upturn in commodity prices, especially oil.
The persistence of inflation in certain services warrants watching, while the implementation of the 7th Central Pay Commission awards will impart an upside to the baseline through direct and indirect effects. On the other hand, there will be some offsetting downside pressures stemming from tepid demand in the global economy, Government's effective supply side measures keeping a check on food prices, and the Central Government's commendable commitment to fiscal consolidation, " it said in a release.
Today's cut in interest rates may force banks to reduce lending rates in the economy, given the fact that the government has already cut interest rates on small saving schemes.