On Monday, India's manufacturing purchasing managers' index (PMI) was recorded at 30.8 for the month of May, which is the second straight month of contraction after the all-time low of 27.4 seen in April. A recording below 50 means contraction in the economy.
Economic activity in the country has seen a sharp decline from 51.8 in March due to nationwide lockdown to curb the spread of COVID-19. Factories were forced to close and consumers were indoors, affecting demand.
A Reuters poll said that the Indian economy is expected to contract for the April-June quarter, for the first time since the 1990s, after the country reported a 3.1 percent growth in Q4 GDP last week, the slowest in 8 years.
"The latest PMI data suggested that Indian manufacturing output fell further in May," noted Eliot Kerr, economist at IHS Markit.
Even as a slight improvement in the index has been reported, sub-indexes tracking new orders and output remained firmly in contraction territory, which led factories to reduce headcount at the sharpest rate since the survey began in March 2005.
Demand was subdued even as both input and output prices declined for a second straight month because consumers remained indoors. It could ease overall inflation, allowing room for RBI to ease policy further.
The RBI has already taken a series of aggressive policy actions to push growth, including a cumulative rate cut of 115 basis points, since the lockdown was imposed on 25 March.
However, optimism about the coming year fell last month.
"The further reduction in May highlights the challenges that businesses might face in the recovery from this crisis, with demand remaining subdued while the longevity of the pandemic remains uncertain," added Kerr.