The Reserve Bank of India has left interest rates unchanged but moved to increase liquidity as it battles high inflation and the prospect of weaker growth.
The RBI earlier cut its prediction for economic growth for the financial year to March from 7.6% to 7%.
The bank has raised rates 13 times since March 2010 to curb prices.
Inflation rose at 7.47% in December which is still well above government targets.
After its review meeting, the RBI confirmed it was leaving the repo rate, at which it lends to commercial banks, at 8.5%.
In response, the main Sensex share index rose 1.5% by mid-afternoon on Tuesday.