India's banking regulator, the Reserve Bank of India (RBI), cut the key lending rate, the repo rate, on Friday to 4 percent from 4.40 percent.
The decision is aimed at providing liquidity to businesses amid the COVID-19 pandemic.
Announcing the policy rate decision, the central bank also addressed the pandemic's grave impact on India's gross domestic product (GDP) growth and warned that it may even turn negative.
The macroeconomic impact of the pandemic is turning out to be more severe than earlier estimated and Indian growth may turn negative this year, said RBI chief Shaktikanta Das.
"For the year as a whole, there is still heightened uncertainty about the duration of the pandemic and how long social distancing measures are likely to remain in place and consequently, downside risks to domestic growth remain significant," said Das.
The inflation outlook is highly uncertain, the RBI warned.
Apart from policy rates, the Indian banking regulator also extended the moratorium on term loans for a period of three months.
As a part of its COVID-19 relief to businesses, the RBI had announced a three month moratorium on term loans until May. This has now been extended through 31 August.
