MUMBAI, India – India's central bank has reversed months of monetary tightening, as concerns about liquidity take precedence over the bank's long battle against double-digit inflation.

The Reserve Bank of India announced Monday night that it will cut the cash reserve ratio – the amount of cash banks have to keep on hand – by 50 basis points to 8.5 percent, releasing 200 billion rupees ($4.5 billion) of funds into circulation.

The bank said the measure was a temporary, ad-hoc response to global financial pressures.

“There has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained. Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned/limited short selling of financial stocks,” the bank said in its statement.

“These new developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity,” it said.

Many market watchers expected the move, which will become effective Oct. 11, though it came earlier than anticipated.

The cut is the latest is a series of steps the Reserve Bank of India has taken to increase liquidity in Indian markets, where overnight lending rates have risen precipitously.

Domestic overnight interest rates peaked at over 15 percent at the end of September, before falling 11.5 percent on October 6, according to Goldman Sachs.

India's inflation, running near 13-year highs, began to stabilize in late August. The most recent government data puts India's annual inflation at 11.99 percent. This time last year it was 3.51 percent.

Goldman said it believes interest rates in India have peaked and that the bank will start cutting rates in the first quarter of next year.

Markets reacted well initially, with India's benchmark Sensex rising nearly 3 percent before falling back into negative territory.