Mumbai: In a surprise development, India's central bank Wednesday cut its key lending rates by 25 basis points, expecting inflation to soften further in the coming fiscal.

The repurchase (repo) rate stands reduced to 7.5 percent from 7.75 percent, while the reverse repo rate has been adjusted to 6.5 percent from 6.75 percent.

RBI chief Raghuram Rajan

"To summarise, softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 percent in the second half," Reserve Bank of Governor Raghuram Rajan said in a statement.

"The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative," said the governor who has otherwise been taking a conservative approach to deal with interest rates.

"Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation."