India's central bank cut its benchmark policy rate by 25 basis points for the second time since the start of the year in a bid to help revive flagging growth in Asia's third-largest economy, but warned that its scope for further policy easing is limited.
In its mid-quarter policy review on Tuesday, the Reserve Bank of India lowered its policy repo rate to 7.50 percent and left the cash reserve ratio for banks unchanged, in line with expectations.
India's economy is on track to grow at its slowest in a decade at around 5 percent in the fiscal year ending this month, and is expected to see modest improvement in the following year.
A recent uptick in headline wholesale inflation, rising food price-driven consumer inflation and a record-high current account deficit limit the RBI's space for monetary easing despite pressure from a government headed into elections by next year.
"Even as the policy stance emphasis addressing the growth risks, the headroom for further monetary easing remains quite limited," the RBI said in its statement.
Indian stocks <.BSESN> and the rupee fell after a key ally withdrew support for the government, after an initially muted reaction to the widely expected rate cut. Bond yields rose slightly.
The current account deficit hit a record-high 5.4 percent in the September quarter and is expected to end the 2012/13 fiscal year at its highest level ever.
February's wholesale price index rose an annual 6.84 percent, faster than in January, although non-food manufacturing inflation, which the central bank uses to assess demand-driven price pressures, slowed to 3.8 percent, the weakest pace since March 2010.
"RBI has continued to maintain limited room for monetary easing. I expect another 25-50 basis points of cuts in 2013," Anjali Verma, economist at PhillipCapital in Mumbai.
In the federal budget announced at the end of February, Finance Minister P. Chidambaram said India's fiscal deficit would fall to 5.2 percent of GDP in the current fiscal year and 4.8 percent in the next year, targets intended to help stave off a sovereign credit rating downgrade to "junk" status.