Inflation drops in April with a modest chance of rising again

In a relief to households, and perhaps for the next government at the Centre as well, wholesale inflation in April declined to 5.2 per cent, a drop of 0.5 per cent from the last month.

Data released by ministry of commerce and industry on Thursday shows that within the three sub-categories of WPI, the fuel and power category registered the biggest rise (8.93 per cent) followed by primary articles (7.06 per cent) and manufactured products (3.15 per cent).

It's the fourth consecutive month of inflation hovering around 5 per cent mark, which is also a "comfortable rate of inflation" for the Reserve Bank of India (RBI).

The central bank, in its monetary policy announcement last month, had said the government's target of achieving its inflation target (eight per cent CPI inflation by January 2015) could be derailed by less-than-normal monsoon due to possible El Nino effects, uncertainty around minimum support prices for agricultural commodities and administered items such as fuel, fertilizer and electricity.

Among all the risks highlighted by the RBI, the looming threat of El Nino is expected to be the biggest. Lower rainfall than usual can directly affect the agricultural output and, consequently, could jack up food prices.

However, the situation is not as bad as it seems.

According to the Indian Meteorological Department (IMD) forecast, the monsoon season (June-September) rainfall will likely be around 95 per cent of the long period average (LPA), which is marginally below the normal rainfall band of 96-104 per cent. It suggests that even though El Nino poses a risk, it is not going to cause major disruption in the agricultural sector in 2014.

Another positive impact on inflation can come from the appreciating rupee. Typically, the movement of the rupee has a lag effect on inflation. Since the beginning of this year, the rupee has been moving up against the dollar.

Then, the administered diesel prices have been raised regularly since January 2013 in order to reduce the subsidy burden. The gradual deregulation of diesel has resulted in the under-recovery on diesel going down from Rs 21 a litre in September 2012 to some Rs 5-6 a litre now. If the under-recovery is kept under control, the possibility of more (diesel) price hikes reduces.

Also, analysts are predicting international crude oil prices to remain stable. "We don't expect too much hike in international crude prices and as a whole, there can be some relief for the inflation trajectory for the next six months," says Siddhartha Sanyal, Chief India Economist, Barclays.