The Reserve Bank of India's (RBI) six-member Monetary Policy Committee (MPC), on Friday unanimously decided to cut the key interest rate, the repo rate, by 25 basis points to 6.25%, according to an official release.

The decision was influenced by the decline in inflation and the slowdown in economic growth. "These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target," the RBI said.

The RBI had kept the repo rate unchanged over the last two years, and this move is the first rate cut by the central bank in nearly five years since May 2020.

The interest rate cut is seen as a move to boost economic activity and encourage spending and investment by making borrowing cheaper, especially at a time when the world economy is slowing.

The RBI also said it will "continue with the neutral monetary policy stance and remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth."

The central bank estimates GDP growth of 6.7% in the next financial year starting April 1. The retail inflation, measured by the consumer price index, is estimated to be 4.2% in fiscal year 2025-26, while in the current financial year it is projected at 4.8%.