India's Index of Industrial Production (IIP) and headline CPI data have raised expectations for the RBI to further ease the monetary policy. As inflation continues to be within the central bank's target rate at 5.6% y/y and IIP contracts by 3.2% y/y in November, there is an expectation for further rate cuts. However, the contraction in IIP in the current fiscal year does not suggest an unexpected decline of India's economic activity. The decline in industrial production is due to the relatively strong growth recorded in the earlier months that was stimulated by the producers' wish to increase inventory.

According to analysts, India's manufacturing activity continues to be weak in spite of the headline growth data. Apart from the weak domestic and external demand, the Indian economy will continue to remain under pressure due to the government's lack of ability to proceed with legislative reforms and a likely deterioration of the fiscal situation. In order to gain back investor confidence, proceeding with reforms will be more important than the monetary policy measures.