RBI on Monday lowered its forecast for its March interest rate to a record low of 0.25 percent, after an upbeat report from the Reserve Bank of India.
The central bank lowered its inflation target for the March quarter to 6.5 percent from 6.75 percent and also raised the benchmark rate to 6 percent from 5.75%.
The RBI also cut its key inflation measure from its earlier 2 percent to 1.75% and lowered its target for inflation to 6% from 7 percent.
The RBI is now projecting a lower inflation rate of 2 percent in March than in February, and the central bank has now cut its inflation rate to just below 6%.
The central banks rate decisions are a continuation of the strategy to hold down the inflation rate while maintaining the low inflation and fiscal consolidation policy.
This is in line with the policy goals of the central banks inflation targets, said a note from the RBI.
While RBI’s inflation target has been lowered, the RBI said that its fiscal consolidation target has remained unchanged at 6.25% from the previous year.
The move is likely to encourage more companies to raise dividends and capital spending to meet their financial obligations, which would be an important stimulus to the economy.
The rate cut comes as India continues to face a fiscal crisis.
The economy is expected to shrink for the second consecutive quarter in March and will likely contract at a faster rate in April.
The government has said it expects GDP to contract by 2.2% in the March-April quarter, which will hurt India’s growth prospects.
The Indian economy has slowed down in recent years and is now expected to contract for the first time since 2009, according to a Reuters poll of economists conducted in September.