Under its new monetary policy framework, the Reserve Bank of India (RBI) is committed to ensure that the economy disinflates gradually to six per cent Consumer Price Index (CPI)-based inflation by January 2016, before it reaches the final target of 4 per cent by 2017-18.
In the last policy, RBI had clearly said the future monetary policy actions will be conditioned by incoming data.
For CPI-based inflation, RBI expected upside risks to vegetable-fruit inflation (sequentially) due to unseasonal rains. But, contrary to the expectations, both the vegetable/fruit prices and the overall CPI sharply moderated sequentially, partly due to weaker rural demand coming from subdued rural wage growth.
The Wholesale Price Index (WPI)-based inflation also contracted significantly last month, printing negative for the sixth consecutive month.
The disinflation in WPI is partly contributed by significantly lower fuel and other commodity prices and partly by very low core inflation.
While CPI-based inflation has remained within the comfort zone, the recently released industrial production data plus on-the-ground channel checks indicate severe growth deceleration with many major sectors like cement, steel, refinery products, tractors, turbines & accessories and consumer durable goods experiencing sharp declines. Even exports have been contracting in a sustained fashion since December.
Other powerful leading indicator of economic activity - the non-oil-non-precious metals imports growth, too, has slowed in the past two months.
The current growth-inflation mix offers enough signs that the setting of monetary policy is getting enough traction to warrant one more policy rate cut during the current calendar year. Luckily, many major banks have cut their lending rates by 15-25 basis points (bps) post the last policy review allaying RBI's concerns about the absence of policy transmission.
An additional rate cut will encourage other sticky players to follow suit. This should at least help the struggling sectors like micro, small and medium enterprises (MSMEs), automobiles and housing finance, to some extent.
Moreover, it will be the last opportunity for RBI to cut policy rates in 2015, given the upside risks to inflation from the likely El Niño conditions, geopolitical tensions and the spillover effects of the upcoming Federal Reserve lift-off.
The author is group chief economist at L&T Finance Holdings. The views expressed are personal.