This is the seventh consecutive cut in lending rates by the bank this fiscal.
A modest overshoot in recent inflation outruns is outweighed by downside risks to RBI's growth estimates.
Base rate has been kept unchanged at 9.50 per cent per annum.
The rate reduction is not applicable to the repo-linked loans.
Central Board of Trustees (CBT) had approved 8.65 per cent interest rate for the last fiscal in February this year.
At present, the EPFO is settling PF withdrawal claims at 8.55 per cent interest rate.
Floating rate loans are re-set as when the interest rates fall or rise, but fixed rate loans are reset in 9-12 months.
India's industrial production growth slowed to 4.3 per cent in July, dragged mainly by manufacturing sector's poor show.
This is credit negative for India's banks as it will limit their flexibility in managing interest rate risk, Moody's said in a statement.
The one-year MCLR will come down to 8.15 per cent per annum from 8.25 per cent per annum from Tuesday.