The surprise move also came after calls from a top adviser of Prime Minister Narendra Modi for rate cuts to fire up the economy.
The ruling Bharatiya Janata Party is already in an election mode.
The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) made a decision to reduce the key policy rate or the repo rate by 25 bps to 6.25% in the last bimonthly policy review of 2018-19 while changing the policy stance to "neutral" from "calibrated tightening".
Developed economies too are altering stance, with the Reserve Bank of Australia governor this week shifting to neutral.More news: Milky Way galaxy is 'warped, twisted' not flat
The interest rate cut coupled with the budget sops would provide much needed respite to the borrowers irrespective of whether it is a vehicle loan, personal loan or home loan.
"Headline inflation is expected to remain contained below or at its target of 4%". While this "pre-election rate cut" might boost growth, the longer-term concerns for investors will be about the RBI's credibility as an inflation fighter, he added. The Federal Reserve has changed direction, and now many analysts expect no US rate hikes this year, after four in 2018. The inflation rate is estimated at 3.2-3.4% in the first half of the year 2019-20 and 3.9 % in the third quarter of 2019-20, said RBI Governor Shaktikanta Das.
This was also the last meeting of the MPC before the Election Commission announces the dates for the Lok Sabha elections.
India's core inflation was pegged at around 5.7 percent in December. The pace has steadily dropped since June's 4.92 percent.
India's retail inflation fell to a 18-month low of 2.19 per cent in December.More news: Ted Bundy Film Starring METALLICA's James Hetfield Officially Coming To Netflix
The MPC also trimmed its economic growth forecast, to 7.2-7.4 percent during April-September, from its previous 7.5 percent estimate.
Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Das and three others voted for a cut in interest rates.
Usually when RBI cuts repo rate, banks typically pass on the benefit to the customers.
It marked the first interest rate decision under new bank chief Shaktikanta Das, an ally of Modi who was appointed in December after his predecessor, Urjit Patel, quit following a public spat with the administration over alleged government interference.
Deviating from the practice of releasing the resolution of MPC in afternoon, the Reserve Bank of India (RBI) uploaded the policy statement it on its website at 11.45 am on February 7.More news: Windies crush England in second Test to clinch series