Leading private bank ICICI and Axis Bank also indicated that they would bring down the lending rates while public sector Andhra Bank was first off the block, cutting interest rate by 0.25 per cent.

While the RBI action will benefit borrowers, it will also lead to reduction in deposit and savings rate. The government also disclosed that it will review the interest rate on small savings, PPF and Post Office deposits, to bring them in line with market.

Heeding to clamour from government as well as industry, Rajan effected the fourth cut in repo rate in 2015, the biggest in three years, on back of moderating inflation and favourable global commodity and oil prices. In its fourth bi-monthly monetary policy for the current fiscal, RBI cut benchmark repurchase (repo) rate from 7.25 per cent to 6.75 per cent, lowest in four-and-half-years.

Rajan justified the reduction saying consumer inflation was likely to be at 5.8 per cent, below the 6 per cent target for January. The focus should now shift to bringing inflation to around 5 per cent by March 2017, he said, adding that RBI will be vigilant for signs of monetary policy adjustments that are needed to stick to the "deflationary path".

RBI lowered its economic growth forecast for the current fiscal to 7.4 per cent from its previous projection of 7.6 per cent. Government and industry welcomed the RBI decision and nudged banks to transmit the benefit to borrowers to boost investments and economy.

"This decision of the RBI will significantly provide policy support to the real economy and help in the recovery process. "We are looking forward now to the transmission of these cuts which will effectively help to boost confidence and investment. They will also help to realise the economy's medium term potential growth rate," Finance Minister Arun Jaitley told reporters here.

Quick to act on RBI cue, State Bank of India (SBI) reduced lending rate by 0.4 per cent to 9.3 per cent per annum, setting a trend for a benign rate regime. Announcing the decision, SBI Chairperson Arunadhati Bhattacharya said the bank will also be cutting fixed deposit interest rate by 0.25 per cent across various maturities from October 5.

ICICI Bank CEO Chanda Kochhar said, "Clearly interest rates will come down, base rates will come down. A large part of the cut will get transmitted. When I say a large part of the thing (repo rate) will get transmitted, it should mean more than half."

With small saving deposits commanding an interest rate of 8.7 to 9.3 per cent, banks have been reluctant to transmit the entire policy rate cut by RBI to borrowers. They want to keep their deposit rates attractive to match with those in small saving schemes, popular among masses.

He said this was being done in response to the 0.5 per cent cut in key lending (repo) rate announced by the Reserve Bank earlier in the day. The Secretary said the government will review all aspects of small saving deposits. BSE Sensex ended 161.82 points higher to close at 25,778.66.

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