The announcement for rate cut follows the 264 billion U.S. dollar economic stimulus package announced in five tranches by India's finance minister last week.
Speaking after the monetary policy committee meeting that has maintained an accommodative stance, India's central bank governor said that the biggest blow from COVID-19 came from private consumption slump with consumer durables production falling 33 percent in March.
There is a collapse in demand in both urban and rural demand since March that has taken a toll on fiscal revenues, said Shaktikanta Das, Reserve Bank of India (RBI) governor, who also further extended the three-month term loan moratorium till August 31.
However, food inflation, which had eased from January peak in February and March, was now a concern as it had surged to 8.6 percent in April with prices of vegetables, oilseeds and milk emerging as pressure points, the governor said.
The governor said that Asia's third largest economy's Gross Domestic Product will be in negative territory in 2020-2021, without quantifying it. Benchmark indices on Indian bourses were trading down by over 1 percent reacting to the bleak outlook narrated by the India's central bank.
The statement goes beyond endorsing the projections made by several investment bankers and credit rating agencies in April that had predicted the Indian economy to plunge to multi-decade low during the year with marginally in positive territory.