RBI cut Repo (overnight lending rate) by 50 basis points to 5 per cent and Reverse Repo (overnight borrowing rate) identically to 3.5 per cent with immediate effect.

The decision, RBI said, "will further encourage banks to provide credit for productive purposes at viable interest rates. Bankers said rates would come down in the days to come.”

The decisions will reduce the borrowing costs of banks, who have been citing high cost of funds as a key handicap for not passing on the full benefit to customers.

"It is a welcome move. This has given a window for banks to cut down rates but how soon and how much has to be decided by bankers individually," Bank of Maharashtra CMD Allen CA Pereira said.

This is the fifth monetary stimulus from RBI since mid-September 2008 to stimulate consumer spending, in addition to three fiscal packages announced by the government since December.

Finance Minister Pranab Muhkerjee, after announcing the third stimulus package in Lok Sabha last month, had said that it was now the turn of RBI to take measures to stimulate the economy.

The decision to reduce key rates follows a review of the current global and domestic macro-economic situation, the RBI said.

Even though banks have cut lending rates in response to RBI's policy stance, the central bank said in a statement that ‘concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth.’

It pointed out that since the announcement of the third quarterly review of the monetary policy on January 27, 11 banks have cut their BPLRs (benchmark prime lending rates) ranging from 25 basis points to 125 basis points. Several banks have also cut their deposit rates.

Noting that the impact of the global financial crisis turned out to be ‘deeper and wider’ than anticipated earlier, the RBI said that banks should ensure that creditworthy enterprises should continue to get funding.

The central bank's decision comes after industrial production fell, for the second time this fiscal, to two per cent in December and exports contracted 16 per cent in January.

"The services sector, which has been the main engine of growth during the last several years, has been slowing down. Business confidence has been dented significantly and investment demand has decelerated," the Reserve Bank said.