India's central banking institution - Reserve Bank of India (RBI) Thursday announced a reduction in repo rate by 25 basis points to 5.75 percent.

Repo rate is the rate at which the central bank lends money to commercial banks in the event of shortfall of funds.

"On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.75 percent from 6.0 percent with immediate effect," a statement issued by RBI said.

"Consequently, the reverse repo rate under the LAF stands adjusted to 5.50 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.0 percent," the statement said.

This is the first meeting after the new Narendra Modi government came to power for the second consecutive term. With the decision to lower the key interest rate, the loans are likely to get cheaper.

RBI said the decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of plus, minus 2 percent (+/- 2 percent), while supporting growth.

The MPC is a committee of RBI that is responsible for fixing the benchmark interest rate in India. The meetings of the MPC are held at least four times a year and after every such meeting, it publishes its decisions.