In the maiden policy after Shaktikanta Das took over as Governor, the Reserve Bank of India on Thursday cut benchmark interest rate by 0.25 basis points to 6.25 per cent.
This is on the assumption that inflation will remain within the target range. This is expected to result in lower monthly installments for home, auto and other loans.
Repo rate, the one at which RBI lends short-term loans to banks, was also cut to 6 per cent, indicating that banks will pass on the benefits to customers.
The central bank also changed its monetary policy stance to 'neutral' from the earlier 'calibrated tightening', an indicator to further softening of interest rates.
Das took over in December after Urjit Patel quit suddenly. The rate cut was opted in 4:2 majority in the six-member Monetary Policy Committee. Deputy Governor Viral Acharya and another member Chetan Ghate voted for status quo in interest rates.
However, the decision to change policy stance was unanimous.
The cut of estimates on headline inflation for the next year was on the basis of it touching an 18-month low of 2.2 per cent in December. It is expected to be 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in third quarter.
"Headline inflation is projected to remain soft in the near term, reflecting the current low level of inflation and the benign food inflation outlook,” the MPC resolution said, adding, "We need to be watchful of vegetable prices, oil prices, trade tensions, health and education inflation, financial market volatility and monsoon outcomes.".
“The rate cut is in consonance of achieving the medium-term objective of maintaining inflation at the 4 per cent level while supporting growth,” it said.