India's central bank today cut its key interest rate to a five-year low of 6.5% citing a dip in inflation, in line with economists' expectations. 

The Reserve Bank of India (RBI) said it would lower the benchmark repo rate, the level at which it lends to commercial banks, by 25 basis points down from 6.75%. 

"Retail inflation measured by the consumer price index dropped sharply in February after rising for six consecutive months," RBI governor Raghuram Rajan said in a statement following the bank's first policy meeting of the fiscal year 2016-17. 

In a Bloomberg News survey of 42 economists, 36 had expected a cut of 25 basis points, while four had expected a deeper cut of 50 basis points and two predicted no change.

India's consumer price inflation softened to a lower-than-expected 5.2% in February and has remained in line with the RBI's target in recent months. 

In February, Finance Minister Arun Jaitley also announced the government would stick to an ambitious target to cut the fiscal deficit to 3.5% of GDP in 2016-2017. 

These two factors have given room for bank governor Rajan, whose main priority is to control once runaway-inflation, to loosen monetary policy by cutting interest rates. 

In 2015 Rajan lopped 125 basis points off borrowing rates in four separate cuts. The bank last cut rates on September 29 with a surprise 50-basis-point reduction.