The latest data prove he has achieved his goals. The rupee is relatively stable, the current account deficit has narrowed substantially and inflation is low. In August, retail inflation dropped to 3.66 per cent and we are fairly convinced that the January 2016 level of retail inflation will be lower than what the Reserve Bank of India (RBI) has projected.
Having achieved the goal of containing inflation, business now wants RBI to shift its focus to accelerating of growth.
Till July, the repo rate was reduced 75 basis points in three stages, matching the reduction in inflation. At this point, it seems there is a scope for more rate cuts. Indeed, insufficient rainfall might lead to drought in some parts of the country and put pressure on food inflation but monetary policy cannot do much to contain food inflation.
To tackle it, the government would need to address supply-side issues. The time for a further 25-bps rate cut is appropriate now.
The economy is showing signs of recovery as the country's Index of Industrial Production (IIP) grew 4.2 per cent in July, over July 2014. Also, a 10.6 per cent rise in capital goods is impressive. On agriculture, the impact due to deficit rainfall in all probability will be balanced by 1.7 per cent higher sowing of land under kharif crops at about 101 million hectares.
Of course, not everything is uniformly looking up. For instance, core sector output, which contributes about 38 per cent of IIP, grew only 1.1 per cent year-on-year in July. The economy now needs a push for reaching the targeted gross domestic product growth of 8-8.5 per cent in 2015-16. A cut in policy rate will help. This will also help the credit growth rise of the banking system, which is at almost a two-decade low now.
Banks have started passing on the benefit of the rate cut to customers.
The US Federal Reserve kept its key rate unchanged on September 17. The dovish outlook of the US Fed will definitely contribute to creating the ground for the fourth round of rate cuts since January in India.
The writer is the founder & managing director of Bandhan Bank