The Reserve Bank of India unexpectedly cut short-term lending rates on Monday in response to continued pressure from the global financial crisis.
The Reserve Bank of India has cut the so-called repo rate by 100 basis points to 8% to stabilise India's finances.
It was the first cut in more than four years. The change will come into effect immediately.
Banks worldwide have already cut interest rates in a bid to boost their economies.
The repo rate is the discount rate at which the central bank lends money to commercial banks to infuse liquidity into the market.
The stock market jumped as much as 5.6% on the news but then fell again before closing up 2.5%. On Friday, it fell to its lowest close since June 2006.
Previous moves
On 8 October, six central banks cut interest rates by half a percentage point in an effort to steady the faltering global economy.
The US Federal Reserve cut rates from 2% to 1.5% and the European Central Bank (ECB) trimmed its rate from 4.25% to 3.75%.
Central banks in Britain, Canada and Sweden and Switzerland all took similar action in the co-ordinated move, cutting rates by half a percentage point. China also cut its rate, by 0.27 percentage points.
The Reserve Bank of Australia cut its rate from 7% to 6% on 7 October.
