Having faced the ire of investors for tightening liquidity conditions earlier in July, the Reserve Bank of India (RBI) has been working on easing those conditions so as to restore market sentiment. The apex bank on Monday slashed the marginal standing facility rate by 50 basis points to 9 percent.

According to a statement released by the apex bank on Monday, "On a review of evolving liquidity conditions and in continuation of this calibrated unwinding, it has been decided to reduce the marginal standing facility (MSF) rate by a further 50 basis points from 9.5 percent to 9 percent with immediate effect."

Marginal standing facility (MSF) is a window through which banks can borrow funds overnight from the apex bank against government securities. Hence, a decline in the MSF rate would make funds available to banks at cheaper rates and this benefit could in turn be transferred to the public at large. Availability of cheap loans is critical to boost investment activity which is necessary for the continuous growth of an economy.

In the last couple of months the Indian rupee had become the most volatile currency in Asia due to the declining investor confidence and as a result, former RBI governor D Subbarao had adopted some stringent measures to restrict flow of capital from the country.

In his first monetary policy review in September, RBI governor Raghuram Rajan had begun the process of easing these liquidity tightening measures by slashing the MSF rate from 10.25 percent to 9.5 percent.

Apart from the decision to further slash this rate to 9 percent, the apex bank has also announced the provision of additional liquidity "through term repos of 7-day and 14-day period for a notified amount equivalent to 0.25 per cent of net demand and time liabilities (NDTL) of the banking system through variable rate auctions on every Friday beginning October 11, 2013."

The next monetary policy review will be announced by Rajan on October 29.