Overall we expect India to have one of the highest rates of growth in the world

Dr. Bimal Jalan, RBI governor

The Reserve Bank governor also restated a forecast of 5-6% in India's economic growth, or GDP, in the current financial year.

"On the GDP front, the services sector seems to be doing alright and we also expect the agriculture growth to be quite promising because the distribution of rainfall has been quite good this year," Dr Jalan said.

"Overall we expect India to have one of the highest rates of growth in the world."

The bank was also pleased with a drop in inflation to 3.2%, from 7.4% a year ago and a rise of nearly $15bn in foreign exchange reserves to $45bn.

Sluggish performance

However, continued sluggishness in industrial and export sectors remained a cause of concern, Dr Jalan said.

According to Dr Jalan, the interest rate cut and the lowering of CRR ratio should inject financial liquidity and help trigger industrial recovery.

According to initial estimates the lowering of CRR alone should free an additional $1.8bn for possible loan disbursement.

Too little?

The measures would make the "monetary and credit environment... positive for growth and positive for industrial recovery", Dr Jalan told journalists soon after announcing the mid-term review of monetary and credit policy.

Shares of nationalised banks, including the State Bank of India, country's largest state owned bank, surged in afternoon trades on Bombay's stock exchange as analysts said the interest rate cut should boost the profitability of public sector banks.

But some observers believe the cut is too small and that it will not kickstart the economy.

"The problem is uncertainty in this post-September 11 climate. Uncertainty is holding back investment decisions," Deepak Lalawani at Astaire and Partners told BBC World Business Report.