This marks the first reduction in rates since May 2013, as inflation showed signs of slowing and the government was making efforts to contain the fiscal deficit.
Thursday's move by the central bank was a bit surprise, as it usually revises rates at policy review meeting.
The RBI is due to have its next monetary policy meet on February 3.
Here are some India Inc voices to NDTV:
Sunil Kant Munjal, Joint managing Director, Hero Moto Corp
"It's a very welcome move and as somebody said in the morning that it is a welcome surprise because normally it is done at the time of the policy review. One thing is clear the expectation of reduction has been on for while now, both because of inflation in India and inflation expectation going forward with the oil prices likely to dip even further.
I hope this is a signal and further reduction will come little bit later because it is necessary. The signal was important to demonstrate the direction in which the Reserve Bank is looking and their expectations to give a nod to the entire economy that we can start expecting lower interest rates now.
"You are seeing a similar response from everyone, a great sense of relief, a bright sense of hope in the new year and the RBI Governor being such an accomplished economist it sends out signal to the economy and to the citizens at large that we are on a path of economic recovery and this is the first signal towards that.
For the real estate, housing and construction sector I think it's a very happy beginning to a new year. We have been experiencing some traction in commercial leasing, but this would give a confidence booster to the individual buyers for homes which are the main stay of the industry in India. So hopefully in the next quarter, once this consolidates and the trends are positive I think in the second quarter of the next financial year, we should see a large amount of launches, large amount of building activity and therefore completion of projects which have been ongoing.
Once this happens you will see a multiplier effect on various industries whether it be cement, steel, glass, ceramics, wood substitutes whatever goes in to the building of an apartment."
MS Unnikrishnan, Managing Director, Thermax
"Very positive move by the RBI, not so unexpected because in any case we were expecting some sort of correction in between before the policy announcement because all factors are pointing towards a rate cut so it's a starting point. He has not touched the CRR. Repo reduction of 25 basis points is going to give the right signal to the banking system and the markets altogether."
The RBI had been under pressure from the government and business leaders to reduce rates to increase lending and help kick-start the economy, but RBI governor Raghuram Rajan insisted that his priority was bringing inflation under control.
In a statement today, the RBI cited lower-than-expected inflation, weak crude prices and weak demand as the reasons for its move, as well as the government's commitment to sticking to a fiscal deficit target. "These developments have provided headroom for a shift in the monetary policy stance," it said.
The central bank has said that it could cut interest rates further should inflation continue to ease, while it would also monitor the government's progress on fiscal consolidation.