The reduction showed policymakers recognised the need to put  the economy on a sounder footing, regardless of data released on Friday that showed India outpaced China by growing 7.5 percent in the March quarter.
"We still have very weak investment. We haven't seen a strong pick-up," RBI Governor Raghuram Rajan told a news conference, adding that there were factors to suggest that growth was weaker than the headline numbers made out.
"In general, the corporate results have been quite weak also suggesting that final demand is yet to pick up strongly," Rajan said.
Many economists, inside and outside the government, suspect a new way used to calculate gross domestic product has overstated how fast India is rising.
Still, the RBI did not take any new steps to free up cash-strapped commercial banks' liquidity, which bankers had said were needed for them to lower lending rates further and pass on the benefits of monetary easing to the broader economy.
Instead, with growth in bank lending at its lowest in almost two decades, the RBI bank urged banks to reduce rates quickly."Meanwhile, banks should pass through the sequence of rate cuts into lending rates," the RBI said in its statement.
Markets had already discounted the RBI cut. After the move the broader NSE share index stood 1.4 percent down from yesterday's close. India's benchmark 10-year bonds fell 3 basis points to 7.85 percent, and the rupee was little changed at 63.77 per dollar, having ended Monday at 63.72.
Investors are hoping that Prime Minister Narendra Modi's economic reforms and aggressive spending on infrastructure will take the under achieving economy to another level.
The latest rate reduction showed the RBI's confidence that that India was in good shape to withstand any market turbulence when the Federal Reserve finally decides to raise interest rates, as it is expected to do later this year.

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