As widely expected, the Reserve Bank of India (RBI) held its policy rates, citing among other things a “sustained hardening of (core) inflation" and the front-loaded cut in June.

Going forward, are further cuts still on the horizon? Despite the seemingly neutral, if not dovish, tone of the statement, syntax suggests that RBI remains deeply cautious about a resurgence of price pressures. Yes, its June views about the “risks to the upside" on inflation have moderated to “broadly balanced" now, and this was reinforced by a 0.2% reduction in the average inflation rate projected for January 2016. What does this imply for monetary policy actions going forward?

The forecast needs to be differentiated from the likely response of monetary policy to this change. It is this indicated response which seems to have hardened. “While the accommodative stance of monetary policy will be maintained…policy actions will be conditioned by…" four factors and developments: (a) “fuller" transmission by banks of front-loaded repo rate cuts; (b) management of food prices; (c) continuation and even acceRBI, rate cut, inflation, monetary policy, policy reformsleration of supply-side policy reforms; and (d) normalization of US monetary policy. Only the last is exogenous to domestic decision processes.

The response of banks’ base (and lending) rates to repo rate cuts (and associated liquidity conditions) have been largely rational. One-year fixed deposit (FD) rates have fallen by around 75 basis points (bps) since January, but overall FDs are about two-thirds of deposits. The share of the other third—current and saving accounts—is falling, reflecting the continuing weak propensity of household financial savings and business environment. Reviving financial savings has to be a priority. The argument that banks need to preserve margins for boosting capital to serve a high-growth economy is also compelling. In any case, there is significant dis-intermediation already evident, particularly in working capital loans.

Domestic reforms are now crucial for catalyzing growth. It is difficult to miss the added emphasis of “even acceleration" in the RBI pre-conditions. Governments, both at the Centre and states, have taken significant measures to manage food inflation, including “proactive supply management". One key step was keeping minimum support prices hikes in 2015 at reasonable levels, an input which is likely to have been a key driver of rampant rural wage growth a few years back. Aadhaar-based cash transfers are also being accelerated, enabling a “repurposing of…poorly targeted subsidies". However, the scope of reforms needs to be widened; the level of potential output is strongly correlated with the productivity increases contingent on a series of reforms. While the government is moving forward with multiple process improvements, including those related to ease of doing business, reforms related to underlying input markets remain largely unimplemented. Implementing the goods and services tax and thereby integrating fragmented domestic markets is key.

In addition to the other deflationary forces at work, the current explosion of e-commerce business does not often get mention. Can the logistics efficiencies at the core of the business model be sustained? Be that as it may, getting inflation down to a sustained 4% +/- 2 by 2018 is likely to be difficult. This timeline will coincide with the disbursement of the 7th Pay Commission recommended salary and pension increases. A crucial part is anchoring inflation expectations. As RBI’s previous statements and interactions with analysts had repeatedly emphasized, expectations’ formation in India is still relatively opaque and suggests adaptive saliency rather than being a forward-looking exercise. This could have been a reason for “households’ inflation expectations rising again".

The closing comments at the post-policy RBI analyst concall were quite telling. While RBI will take advantage of current “propitious conditions" to reduce inflation once and for all, it will not adopt a Volckerian deflationary stance. In the near-to-medium term, if our assumptions about consumption demand, capacity and commodities remain correct, RBI will have room to cut its policy repo rate at least another 25 bps. But the window will be small, and a function of the productivity increases fostered by policy reforms.

The author is senior vice-president and chief economist, Axis Bank Ltd. The views are personal.