RBI cuts repo, reverse repo rates by 100 basis points, fiscal stimulus seen

The latest decision comes a day after the government cut state-set domestic fuel prices by 10 percent and two days after the latest government data showed that inflation rate had fallen to a seven month-low level of 8.40 percent.

In a press conference, RBI Governor D. Subbarao acknowledged that "there is evidence of economic activity slowing down" though the economic impact of the ongoing global financial crisis and the recent terror attacks in Mumbai, which left nearly 200 people dead, was difficult to estimate.

"Industrial activity, particularly in the manufacturing and infrastructure sectors, is decelerating," Subbarao said.

However, the RBI governor said the central bank is keeping a close watch on global and domestic markets and is optimistic that the economy would soon return to robust growth track.

"I am hopeful and confident that we will be able to return to normalcy, make an adjustment and our business and industries will continue their regular activity notwithstanding the terrorist attack," Subbarao said.

The cut in the repo and reverse repo rates, he said, "should result in a reduction in the marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms."