The Reserve Bank of India has cut its short- term lending rate (repo rate) by 100 basis points to 8% as against 9% till now. This is a surprise move, which comes before the scheduled credit policy on October 24th.

According to a central bank statement, "The Reserve Bank has been, and will continue to monitor the impact of global developments on our financial markets and on our liquidity conditions and will take action as appropriate."

"In order to alleviate the pressure and, in particular, to maintain financial stability, the RBI has decided to reduce the repo rate under the liquidity adjustment facility by 100 basis points to 8 percent with immediate effect," said the statement.

This move is likely to spur consumption along with reduction in interest rates. Bankers that had been hesitant to lower their lending rates until now may rush forward to lend at a lower rate. HDFC Bank's Deputy Treasurer, Ashish Parthasarathy said: "It is a welcome step and clearly shows that the interest rate regime is now on a descent curve."

The repo cut has been the first since 2004 and will come into effect immediately. This cut has paved the way for cheaper home, consumer, corporate and personal loans.

Indian Finance Minister P Chidambaram said that the move "will enthuse investors to continue to take forward their investment proposals." He also thinks that this move would prove "beneficial" to borrowers and investors as well as boost confidence in the economy.

Earlier RBI had cut the CRR by 2.5% in order to infuse liquidity into the system. Rs 100,000 crore were injecting into the financial system through the several cuts in CRR.

Mr. Chidambaram has also claimed the RBI's decision as part of the series of measures to moderate inflation and raise economic growth.