In a surprising development, Reserve Bank of India (RBI) Chief Raghuram Rajan today slashed the repo rate by 25 basis point from 8 percent to 7.75 percent with immediate effect.

The cash reserve ratio (CRR), however, remains unchanged at 4 percent. The reverse repo rate under the LAF stands adjusted to 6.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.75 percent. The RBI would next meet on February 3.

It is to be noted that RBI was under intense pressure from government and business leaders to reduce rates to increase lending in order to boost the country's sagging economy.

The RBI decided to accept the demand after the Wholesale Price Index (WPI) based inflation moved up marginally in December to 0.11 percent from zero level in November, reversing the six month declining trend.

"Key to further easing are data that confirm continuing disinflationary pressures," Rajan said in the statement. "Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure."

The inflation rate has increased slightly due to spurt in 'food items' basket. Food inflation last month moved to 5-month high of 5.2 percent, showed the government data.

"Today's rate cut should be seen as a carrot before Prime Minister Narendra Modi's government unveils its fiscal budget next month," said Mole Hau, a Hong Kong-based economist at BNP Paribas SA to Bloomberg.

"The ball is in the government's court."