The reduction in the key interest rate will allow banks more room to lower the EMI burden for their borrowers. The RBI Governor also extended the loan moratorium - which allows banks to defer EMI payments by their customers - by another three months till August.
The announcements were aimed at countering the fallout from the ongoing nationwide lockdown to contain the spread of coronavirus pandemic, which has pushed the economy into a standstill, hurt businesses and landed thousands jobless.
In his first address to the media after the government detailed the fiscal and monetary stimulus worth Rs 20.97 lakh crore, Mr Das said economy is expected to remain in the negative territory in the current financial year due to the COVID-19 outbreak. Mr Das added that headline inflation may remain firm in the first half of the current financial year and only ease in the later part of the year.
RBI also announced a reduction in the reverse repo rate - the interest rate at which the RBI borrows funds from commercial banks - to 3.35 per cent from existing 3.75 per cent.
The committee decided to continue with its "accommodative" policy stance, which means the central bank is ready to ease monetary policy further to support the financial system.
Five members of the Monetary Policy Committee (MPC) voted in favour of rate reduction, RBI Governor Shaktikanta Das said through a video address.
The RBI extended the term loan moratorium and also relaxed the repayment terms (interest payments) to prevent a cash-squeeze for borrowers.
The RBI Governor said the combination of fiscal, monetary and administrative measures will create conditions that will enable a gradual economic revival, going forward.
Economists say the transmission of lower interest rates by banks to their customers will be closely watched.
"The RBI flagged risks of a negative growth print this year, while holding back on a point target. They expect disinflationary forces to dominate, suggest they open for further reduction in cuts," said DBS Bank economist Radhika Rao.
In March, the RBI had slashed the repo rate by 75 bps to stimulate growth, and the next month, it unexpectedly lowered the key deposit rate - or reverse repo rate - to 3.75 per cent, in a bid to discourage commercial banks from parking idle funds with it and spur lendin .
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