India's central bank the Reserve Bank of India (RBI) on Tuesday announced to keep its policy rate unchanged, but cut the cash reserve ratio (CRR) by 25 basis points to 4.25 percent.

According to RBI's quarterly monetary policy announcement, CRR, the portion of deposits that banks have to maintain with the central bank, was reduced to 4.25 percent.

RBI decided its repo rate, or the rate at which banks borrow overnight funds from RBI, unchanged at 8 percent.

RBI Governor, D Subbarao cautioned that the policy guidance will depend on evolving growth-inflation dynamics and added that downside risks to global growth prospects have risen. The governor sees serious spillover risk of crisis in advanced economies.

Giving rational for the cut in rates, governor, D Subbarao said policy stance is "intended at managing liquidity to ensure adequate flow of credit to the productive sectors of the economy."

According to RBI, the CRR cut is meant to inject Rs 17,500 crore (about $3.25 billion) into the banking system. It is intended to pre-empt prospective liquidity crunch.

He also said that the policy action is intended to reinforce the positive impact of government policy actions on growth as inflation risks moderate and maintain an interest rate environment to contain inflation and anchor inflation expectations.

The latest CRR cut is on top of three reductions by a cumulative 150 basis points since January as part of an effort by the RBI to ease liquidity in the banking system. One basis point is one-hundredth of a percentage point.

The central bank hiked its key policy rate 13 times since March 2010 to control inflation before reversing its stance and cutting the repo rate by a more-than-expected half a percentage point in April.