The Reserve Bank of India surprised markets with a 25 basis point cut in interest rates today and signalled it could do more.
The move comes amid signs of slowing inflation and what it said was a government commitment to contain the fiscal deficit.
While the early move was unexpected, big cuts in rates have been expected over the course of the year to help India's economy out of a rut, with growth rates struggling to recover from their weakest levels since the 1980s.
Acting ahead of a scheduled RBI policy meeting on February 3, the central bank lowered the repo rate - its key lending rate - to 7.75% from 8%, where it had been for the past year.
The cut was seen as a concession by the bank's Governor Raghuram Rajan to the government of Prime Minister Narendra Modi as it pursues policies to encourage investment-led growth, while seeking fiscal consolidation.
Deputy Finance Minister Jayant Sinha said the cut marked an "inflection point" after a period of high interest rates.
Largely thanks to plunging global oil prices and lower food costs, India has seen growing signs of a sustained slowdown in inflation.
Wholesale prices rose just 0.11% year-on-year in December, after staying flat in November, according to data released earlier this week. A Reuters poll of economists had forecast a 0.6% rise.
Retail inflation, meanwhile, rose to 5% in December - again below the 5.4% annual rise predicted by a Reuters poll. The RBI has targeted retail inflation at 6% by January next year.
The Reserve Bank of India cited lower than expected inflation, weak crude prices and flagging demand as the reasons for its move, as well as the government's commitment to sticking to a fiscal deficit target.
It said further moves would take the same factors into account.
India's stock market was the second best performer in Asia last year in dollar terms due to investors' hopes that Modi, who was elected in May, will push key reforms and invest in infrastructure to unlock India's growth potential, having suffered two consecutive years of sub-5% growth.