In its mid-quarter monetary policy review announcing the key rate cut, the Reserve Bank of India said since January, global financial market conditions have improved although global economic activity has weakened.
"On the domestic front too, growth has decelerated significantly, even as inflation remains at a level which is not conducive for sustained economic growth. Although there has been notable softening of non-food manufactured products inflation, food inflation remains high, driving a wedge between wholesale price and consumer price inflation, and is exacerbating the challenge for monetary management in anchoring inflationary expectations," the bank said.
India's economy, Asia's third largest after China and Japan, is forecast to grow about 5 percent this fiscal year ending this month, a decade low, but expected to improve in the next fiscal year.
The coalition government of Prime Minister Manmohan Singh is also battling rising fiscal and current account deficits and high food price inflation.
"What is worrisome is that the services sector growth, hitherto the mainstay of overall growth, has also decelerated to its slowest pace in a decade," the bank said.
C. Rangarajan, chairman of the prime minister's economic advisory council, speaking to the Economic Times, welcomed the latest central bank move.
"Everyone expected the rate cut, non-food manufacturing inflation has been brought down," he said.