India's RBI surprises with new rate cut

India's central bank unexpectedly lowered its policy rate for the second time this year yesterday, backing a government that is pushing to revive economic growth as inflation cools.

Although markets had broadly expected the Reserve Bank of India to reduce rates again after a cut in January, few had expected a move just days after the government unveiled a budget that took a slower path to lowering the fiscal deficit.

The reduction in the RBI's policy repo rate by 25 basis points to 7.5 per cent sent Indian bond prices to 20-month highs.

"Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation," RBI governor Raghuram Rajan said in a statement.

Rajan aired doubts over the credibility of official data after recent changes to methodology showed India's economy grew 7.5 per cent in the last quarter, faster than China.

"Nevertheless, the picture of a steadily recovering economy appears right," he said.