The Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, also kept its policy stance neutral.
Along with the rate cut, the RBI sharply lowered its inflation forecast for FY26 to 2 per cent from 2.6 per cent and increased its growth projection to 7.3 per cent from 6.8 per cent earlier.
Following the announcement, the Sensex closed at 85,712.37, rising 447.05 points or 0.52 per cent.
The Nifty also ended higher at 26,186.45, up 152.7 points or 0.59 per cent. Analysts said that Nifty closed near 26,200, firmly holding above the 26,000 psychological mark.
“Strong support remains intact in the 26,000–26,100 band, which continues to act as the immediate demand base,” they added.
“A sustained closing above 26,300 is required to unlock the next upside leg towards 26,450–26,600,” market watchers mentioned.
In the broader market, the Nifty MidCap index gained 0.49 per cent, while the Nifty SmallCap index slipped 0.57 per cent.
Most major sectoral indices finished in the green. Nifty PSU Bank was the strongest performer with a 1.5 per cent rise.
Banking, auto, IT, metal, realty, oil and gas, and chemical stocks also moved up. However, media, pharma, consumer durables, and FMCG indices ended lower.
On the Sensex, State Bank of India, Bajaj Finserv, Maruti Suzuki, Bajaj Finance, and HCL Tech were the top gainers.
Hindustan Unilever, Eternal, Trent, Sun Pharma, Tata Motors PV, and Bharat Electronics were among the major losers of the day.
Analysts said that Indian markets have enthusiastically responded to the RBI's unexpected 25 bps rate cut, a move that seemed unlikely given the strong Q2 GDP data.
“This surprise, combined with sharply lower inflation forecasts and supportive liquidity measures, has triggered a risk-on sentiment across equities,” market experts added.
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