Only a day earlier, data on India's wholesale price index (WPI) based inflation showed a decline of 0.11 percent in December 2014 from 6.40 percent year-on-year.

Retail inflation too fell to a low of five percent in December from 9.87 percent during the corresponding month of 2013.

After the surprise move, equity markets, especially interest sensitive stocks, zoomed. Bonds and rupee too surged drastically.

The barometer index of Indian equities markets closed the day's trade 728.73 points or 2.66 percent up with all the sector-based indices ending with healthy gains.

Interest-sensitive sectors like banking, auto, capital goods, realty, oil and gas, fast moving consumer goods (FMCG) and consumer durables sectors rallied.

Finance Ministry welcomed RBI's move stating that it will help in providing a fillip to the economy by increasing the private sector's ability to spend, as well as, indirectly improving the balance sheet of the corporate sector and banks.

Lauding the RBI's move, Federation of Indian Chambers of Commerce and Industry's (FICCI) president Jyotsna Suri pointed out that the cost of finance was an important factor for giving boost to the industrial sector, which has been under stress for a long time now.

"This measure will help in improving the investor sentiment. FICCI hopes that this will be the beginning of further cuts in the policy rate by the central bank, and will enable its transmission into lower lending rates by the banks," Suri said.

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