* RBI cuts repo rate 25 basis points to 7.5 pct
* Second cut this year, embarked on easing cycle in January
* Both made outside of regular policy reviews, surprising markets
* Rajan says economic growth recovering steadily (Adds quotes from Rajan's teleconference)
By Rafael Nam and Neha Dasgupta
MUMBAI, March 4 (Reuters) - India's central bank unexpectedly lowered its policy rate for the second time this year on Wednesday, backing a government that is pushing to revive economic growth as inflation cools.
Although markets had broadly expected the Reserve Bank of India to reduce rates again after a cut in January, few had expected a move just days after the government unveiled a budget that took a slower path to lowering the fiscal deficit.
After cutting the policy repo rate by 25 basis points to 7.50 percent, RBI Governor Raghuram Rajan issued a statement citing his reasons for making the move a month before a scheduled policy review.
"Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action," he said.
The RBI embarked on an easing cycle on Jan. 15 with a quarter percentage point reduction that had also caught market off guard by taking place outside of a scheduled review.
The benefits have still to pass through to borrowers, however, as commercial banks have been hesitant about lowering their lending rates.
While seeing improvement in the economy, Rajan doubted whether it was doing as well as official gross domestic product data suggested, after recent changes to methodology showed India outpacing China by growing 7.5 percent in the last quarter.
"Nevertheless," he said, "the picture of a steadily recovering economy appears right."
TRUSTING MODI'S BUDGET
Analysts said the latest rate reduction showed the RBI's trust in the 10-month-old government of Prime Minister Narendra Modi to maintain fiscal discipline even though it will take longer to reach its deficit goals.
The budget laid out plans to reduce the fiscal deficit to 3.9 percent of gross domestic product, in the 2015/16 financial year, and bring it down to 3.0 percent by 2017/18 - a year later than an earlier road map had targeted.
"This is a good beginning and we are going to be watchful," Rajan told analysts in a conference call. "There are lots of plans and a lot of intent (in the budget), so we are going to see how it rolls out."
Describing the deficit reduction plan as "very prudent", junior finance minister Jayant Sinha said the government was striking a balance between making more gradual reductions in the deficit and investing in infrastructure and key sectors.