The reverse repo rate, the rate at which the Reserve Bank absorbs excess cash from the system, falls to 5.0 per cent from 6.0 per cent, its lowest in more than three years.
Both reductions are effective from Monday, Dec 8. The main lending rate, or repo rate, has now been cut by 250 basis points since Oct. 20, when the Reserve Bank made its first rate reduction in more than four years to shield the economy from the global financial crisis.
This was the first change in the reverse repo rate since July 2006.
The cash reserve ratio, the proportion of deposits banks must keep with the central bank, was left unchanged at 5.5 per cent. The Reserve Bank said it was also taking other steps to improve liquidity and shore up economic activity.
RBI also allowed select banks to buyback foreign currency convertible bonds from customers to "take advantage of current discounted rate at which these bonds are trading."
Announcing the fresh measures, RBI Governor D Subbarao said that "taken together with earlier measures, these would step up demand and arrest the growth moderation."
He was also confident that the government's decision to lower petrol and diesel prices would further ease inflation.