Central bank cuts cash reserve commercial banks must hold to 7.5% to boost liquidity.
India's central bank on Friday said it would inject a further 400 billion rupees ($8.2 billion) into the financial system, by cutting the cash reserve commercial banks must hold to 7.5 percent.
"This was done due to the evolving liquidity situation in the context of global and domestic developments," the RBI said in a statement.
The RBI injected 200 billion rupees into the financial system on Monday.
The step came after many businesses had complained tight credit conditions were hurting demand and slowing growth in Asia's third-largest economy.
The bank, which has been steadily tightening monetary policy since 2004 in a bid to douse inflation now at 11.99 percent, said it would "respond swiftly" to any external development.
"We will act even preemptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations," the bank added.
The bank acted after Mumbai's benchmark 30-share Sensex index tumbled Friday by 896.98 points or 7.92 percent to 10,431.38 in early trading, and the rupee fell against the dollar to a more than six-year low of 49.07, due to the deepening global financial crisis and fears of further foreign fund outflows.
"I think we should be clear that the government has said the fundamentals of the economy are strong," Finance Secretary Arun Ramanathan told reporters after the RBI announcement.
"We are sufficiently strong enough to handle anything," Ramanathan said.
The Indian government has issued a series of reassuring messages this week, pointing to the country's vast foreign exchange reserves and its domestic- rather than export-driven growth as factors that would help cushion the national economy from the global financial crisis.