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The Reserve Bank of India on Saturday slashed its key short-term interest rates by 1 percentage point to boost growth and shore up investor confidence amid signs of economic slowdown and in the wake of deadly attacks in Mumbai.

The Reserve Bank of India (RBI) reduced its key lending rate, or repo rate, by 100 basis points to 6.5 percent, its lowest rate in 2- years, with effect from Monday.

The reverse repo rate, the rate at which the central bank absorbs excess cash from the system, falls to 5.0 percent from 6.0 percent, its lowest in more than three years.

"Industrial activity, particularly in the manufacturing and infrastructure sectors, is decelerating," RBI Governor Duvvuri Subbarao told a news conference.

Subbarao said the central bank would closely monitor developments in global and domestic financial markets and would take swift and effective action as appropriate.

"The Reserve Bank's policy endeavour will be to minimise the negative impact of the crisis and to ensure an orderly adjustment," he said.

The main lending rate has now been cut by 250 basis points since Oct. 20, when the RBI made its first rate reduction in more than four years to shield the economy from the global financial crisis.

Saturday's decision was the first change in the reverse repo rate since July 2006.

The cash reserve ratio, the proportion of deposits banks must keep with the central bank, was left unchanged at 5.5 percent.

Expectations of rate reductions have mounted ever since last week's attacks in Mumbai in which gunmen brought the business district to a standstill as they holed up in two luxury hotels and a Jewish centre, killing 171 people.

The benchmark 10-year bond yield fell 8 basis points to 6.76 percent on Friday ahead of the RBI's decision, which had been well flagged by government officials, and the rupee gained against the dollar.

The government is also expected to announce fiscal measures to give impetus to the economy, which data show may be decelerating more rapidly than anticipated from an annual rate of 9 percent in the fiscal year which ended last March.

The exact timing of the government's expected steps is not known.

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