Reserve Bank of India (RBI) governor, Raghuram Rajan, brought down its key policy rate by 25 basis points to 7.5 percent, rekindling hopes of lower EMIs for home loan borrowers and cheaper bank capital for companies.

In the last 3 months, this is the second rate cut by RBI amid benign inflation rates. While wholesale inflation was (-) 0.4 percent in Jan, retail inflation was 5.11 percent - much lower than the target of 6 percent by January 2016.

After the announcement, the markets welcomed the move, with the BSE Sensex jumping over 430 points to cross the 30,000 mark for the first time ever. At the same time, rupee strengthened by 27 paise to trade at 61.65 against dollar in early trade today at the Interbank Foreign Exchange.

RBI utilizes monetary tools to stymie demand and cool prices. In times of low prices and weak growth, it is expected that RBI will slash interest rates to goad companies to invest, hire more, add capacities, and prompt people to spend on cars, houses and other goods.

The repo rate cut comes four days after the presentation of the union budget for 2015-16 and two days after the government and the RBI announced that they have agreed to adopt a monetary policy framework, which will make taming inflation the main priority of the central bank's policy decisions.

Under the new system, the RBI will set a new retail inflation target of below 6 percent by January 2016 and 4 percent by March 2017. The framework will also empower the central bank to decide the most appropriate measures needed to achieve that target.