NEW DELHI: India's central bank made a surprise move on Thursday to cut its interest rate to 7.75%, thanks to lower-than-expected inflation.
The benchmark interest rate, or the level at which The Reserve Bank of India (RBI) lends to commercial banks, had been kept at 8% since last January.
The move came ahead of the bank's regular meeting next month and analysts said it paved the way for further cuts.
The bank said in a statement the rate would be cut immediately.
The RBI cited a "sharper-than-expected decline" in the price of fruits and vegetables since September last year as one reason for the policy shift.
It also said "ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil" had played a part in the move.
The RBI has been under pressure from government and businesses to reduce its interest rate to give the struggling economy a boost.
Lower interest rates lead to increased lending, which in turn helps economic expansion.
We were expecting this rate cut - but not today.
After a couple of months of 'will they-won't they' speculation ahead of scheduled meetings, India's central bank has decided it will - a few weeks before it was next due to meet.
The markets are up and that's no surprise.
Industry has been clamouring for a rate cut for a while - many say the high cost of borrowing has been holding them back, especially in manufacturing.
Low inflation is the bank's main reason for its decision.
But while that figure has come down sharply, largely thanks to lower crude prices, it's worth pointing out that ordinary Indians aren't feeling as much benefit from that as you might expect.
The government has recently raised taxes on petrol and diesel - so prices at the pump aren't as low as they would have been.
Delivering on a promise
India, which is Asia's third-largest economy, has been battling an economic slowdown and has a history of high inflation.
But this week, official figures showed the country's wholesale price index (WPI) for December rising 0.11% from a year earlier. Most economists were expecting a more substantial 0.6% rise.
Analysts said the reading had reinforced the case for the RBI to begin easing monetary policy by lowering rates.
The WPI reading and the consumer price index (CPI) are the two main inflation indexes in India.
Recently, the RBI has shifted its focus to CPI as the key measure of Indian inflation.
The CPI reading for December was up 5%, which is below the RBI's 6% target.
"The latest WPI and CPI readings for December together reinforced the case for an early rate cut," IHS Global Insight's Rajiv Biswas told the BBC.
Biswas said the bank's governor Raguram Rajan had signalled in late 2014 that the RBI was likely to ease monetary policy in early 2015.
"And he has delivered on his promise.
"This is likely to be just the first of a series of rate cuts in 2015 ... with at least a further 75 basis points of easing expected."