Four of six MPC members voted to cut the rates, while all backed the stance change to "neutral" from "calibrated tightening".
A former economic affairs secretary, who now has the charge of central bank and is perceived to be close to the Union government, will not take "no" from banks on rate cuts too quickly. The RBI has thus cut rate for the first time in 17 months since August 2017.
The Reserve Bank lowered the policy rate by 25 bps to make the most of the space offered by the softening in prices, and will deliver more on the rate front if its lower inflation estimates are achieved, governor Shaktikanta Das said on Thursday.
GDP growth for 2019-20 is projected at 7.4% - in the range of 7.2-7.4% in H1, and 7.5% in Q3 - with risks evenly balanced. Also, the collateral free lending limit for agriculture has been increased to Rs 160,000 from Rs 100, 000 earlier, which is positive for consumption.
"Investment activity is recovering but supported mainly by public spending on infrastructure", the MPC said in a statement.
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The six-member Monetary Policy Committee (MPC), headed by RBI governor Shaktikanta Das, noted that large part of the current investment recovery has been driven by government spending and it was necessary to broad base the revival with a private sector boost. One, there will likely be a series of rate cuts from this point and the cumulative impact will considerably put pressure on banks to pass on the benefit to the end-consumer.
"First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based".
It further said that in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds.
Trade tensions and associated uncertainties appear to be moderating global growth, the bank said. It also stayed below RBI's inflation target of 4 per cent for five consecutive months.
"On the basis of an assessment of the current and evolving macroeconomic situation at its meeting today, the Monetary Policy Committee (MPC) chose to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.50% to 6.25% with immediate effect", the RBI said in a statement. 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. "Growth in rural wages moderated in October", RBI said. The MPC voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous.