RBI's Monetary Policy Committee (MPC), the designated inflation nutter, also changed its stance to neutral allowing itself more headroom to either hike or cut rates in the near future.
Das, in his maiden monetary policy review, has moved away from the usual practice of announcement 2:30 pm.
The committee voted 4:2 to pare the repo rate by 25 basis points to 6.25 percent.
Speculations were there that the six-member MPC, headed by RBI Governor Shaktikanta Das, will announce repo rate cut to ease pressure on banks.
Commenting on the RBI rate cut, Ankur Dhawan- Chief Investment Officer-PropTiger.com, said "Industry was expecting a bigger rate cut than announced".
Thursday's cut is welcome news for Prime Minister Narendra Modi's government, which wants to boost lending and lift growth as it faces elections by May.
The ruling Bharatiya Janata Party is already in an election mode. The 'repo rate is a key interest rate at which the Central Bank lends short-term funds to commercial banks.
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This was the first meeting of the monetary policy committee (MPC) under Shaktikanta Das who took over as the RBI governor in December after the sudden exit of Urjit Patel over differences with the Modi government.
The central bank pegged the growth in Gross Domestic Product at 7.4% in 2019-'20. The RBI has forecast inflation to be in the range of 3.2-3.4 per cent in April-September 2019, lower than its earlier prediction of 3.8-4.2%.
The rate cut is in the right direction given that the inflation footprint has been benign for some time.
While four members of the MPC including Das voted for a rate cut, RBI deputy governor Viral Acharya and independent member Chetan Ghate, a professor at the Indian Statistical Institute were in favour of maintaining a status quo on rates. "It also signals a commitment to a symmetric policy to achieve its 4 per cent inflation target - a departure from the RBI's previous one-sided, conservative stance that aimed to keep inflation below the target."- Abhishek Gupta, Bloomberg Economics.
Nomura is of the view that RBI's new growth forecasts are too optimistic. "Both recent history and forward guidance make a compelling case for the rate cut".
The NSE Nifty initially slipped but closee up 0.06 percent at 11,069.40 while the 10-year benchmark government bond yield fell to 7.51 percent from Wednesday's close of 7.56 percent.
The rupee weakened to 71.69 to the dollar immediately after the decision, but it later strengthened to 71.42.