India's industrial growth fell sharply in July after rising for two months, with data suggesting that the monsoon has not revived rural demand and investments are yet to pick up.
Growth as measured by the Index of Industrial Production (IIP) contracted 2.4% in July, led by a 3.4% fall in manufacturing and a 0.8% rise and 1.6% gain in mining output and power generation, respectively. Car sales and the manufacturing purchasing managers' index in August were strong, suggesting a further recovery in urban consumption-led demand.
The IIP reading for June was revised to a 1.9% increase, compared with a 2.1% rise earlier.
For the first four months of 2016-17, the IIP declined 0.2%.
India's retail inflation fell sharply to a five-month low in August due to a rapid cooling of vegetables prices, raising hopes that the newly appointed RBI governor Urjit Patel could cut interest rates in the next monetary policy review on October 4. A sharp 2.4% fall in industrial production for July has further strengthened the case for a rate cut to revive demand to clear extra capacity that is holding up investments.
Consumer inflation eased to 5.05% in August from 6.07% in the month before. Food inflation moderated to 5.91% in August from 8.35% in July due to a sharp fall in inflation in vegetables to 1.02% from 14%.
Experts expect more moderation with further easing in prices of pulses and have penciled in on rate cut of 25 basis points before the end of the year.
The Consumer Price Index (CPI), the gauge of inflation at retail level, is still above RBI's target of 5% by March 2017.