Accordingly, the CRR or the portion of deposits banks have to park with the RBI now stands at 4.25 per cent while the repo rate, at which RBI lends to the system, has been retained at 8 per cent.
The reverse repo, at which RBI absorbs excess liquidity through borrowings from banks, remains at 7 per cent.
Reacting to the policy, the BSE 30-stock index, Sensex, slid 181.72, or 0.98 per cent, to 18,454.10 at 1138 hrs.
The new rates will be effective November 3, RBI Governor D Subbarao said while unveiling the mid-year monetary policy review.
"Managing inflation and inflationary expectations remains the primary focus of the monetary policy," Subbarao said, stating that the persistently high inflation remains a "key challenge" even though growth has slid.
The CRR cut, the Governor said, is aimed at enhancing liquidity. It will infuse Rs 17,500 crore into the system, complement the Government's reform measures and anchor medium term inflation expectations.
The easing of CRR would release primary liquidity prompting banks to cut interest rates.
The RBI has also revised downwards the GDP growth estimate to 5.8 per cent from the earlier 6.5 per cent, while increased its March-end headline inflation forecast to 7.5 per cent. It is the second time since the beginning of the fiscal that it has revised its estimate on both the aspects.
There was widespread expectation that the Governor may play the ball with the government today especially after North Block announced a fiscal consolidation roadmap against the backdrop of the backdrop of the gush of reform measures announced in the past 45 days.
"As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a higher growth trajectory," Subbarao said.
In the second quarter review, the RBI also introduced a slew of measures on banking regulation, including steeply increasing the provisioning on standard restructured assets to 2.75 per cent from the earlier 2 per cent from immediate effect.
This move will dearly impact the banks, which have been witnessing an unprecedented rise in loan restructuring due to economic stress. Some critics also call it as a ploy by the banks to restructure loans, and not show them as NPAs, in order to protect their bottom-lines.
Significantly, the policy does not mention anything about new bank licences but said initiatives will be taken for having new urban co-operative banks.
The other moves ushered in include a revision in priority sector lending norms, guidelines to banks on restructuring and non-performing assets management, management of unhedged currency exposures of companies and insistence of timely reporting of advances to credit information companies.
RBI also said the existing KYC (now your customer) requirements used for new account openings will be simplified soon, liberalising opening of administrative offices in tier-I centres for domestic banks and having an additional batch of NEFT clearance at 8 AM daily.