The Reserve Bank of India lowered the repurchase rate by one percentage point to 5.5 percent and the reverse-repurchase rate by the same margin to 4 percent, it said in a statement in Mumbai. The government also more than doubled the amount overseas investors can hold in local bonds and extended capital to the nation's banks.
Governments worldwide are cutting interest rates and announcing spending packages to boost growth amid a deepening global slump. Prime Minister Manmohan Singh, seeking re-election in May, is aiming to boost consumption as a decline in exports forces companies to reduce production and fire workers.
India has become increasingly vulnerable to slowdowns and financial crises in other countries.
Trade represented 35 percent of GDP for the year ended March 31, up from 21 percent in 1997-98, the year of the Asian financial crisis, according to the central bank.
Exporters have cut about 65,500 jobs as recessions in the U.S. and Europe, the nation's biggest markets, damped overseas demand. Industrial production fell 0.4 percent in October, the first decline in 15 years, and exports plunged 9.9 percent in November after falling for the first time in seven years the previous month.
The monetary authority has slashed its overnight lending rate, the repurchase rate, by 3.5 percentage points and its borrowing rate, the reverse repurchase rate, by 2 percentage points since Oct. 20. It cut the proportion of deposits banks must hold in reserve by 4 percentage points to the lowest since 2006.