The Reserve Bank of India (RBI) reduced the key rate at which it lends to banks from 6.5% to 6.25% on Thursday, surprising most economists polled by Reuters and Bloomberg who had predicted rates would remain unchanged.
The RBI, now led by former finance ministry official Shaktikanta Das, cited a drop in inflation, lower oil prices and a global economic slowdown as factors behind its decision. Retail inflation in India fell to 2.2% between October and December, its lowest level in 18 months, while core inflation dipped to 5.6%.
The rate cut could fuel concerns over the autonomy of the country's central bank.
On Thursday, the central bank shifted its broader monetary policy stance from "calibrated tightening" to "neutral."
"Shaktikanta Das has delivered what the Modi government was hoping for," Mark Williams, chief Asia economist at Capital Economics, said in a note.
"A rate cut today will do little to boost the economy before the election," Williams added. "But it might be expected to give a lift to financial markets and investor sentiment."