Manu Kaushik
In what could bring cheer to the apex bank and lead to a possible correction in interest rates, the inflation figures for the month of December - both
consumer price index (CPI) and
wholesale price index (WPI) - have dropped. After staying high for most part of the second half of 2013, the WPI touched a five-month low of 6.16 per cent in December.
Most analysts are now expecting
inflation to fall further. However, a closer look reveals that the current drop could be temporary.
In recent months, the rise in inflation is largely attributed to the rise in food prices. But pulses and cereal inflation have been softening over time due to good monsoon and a moderate rise in MSP (minimum support prices) over the past one year. Food grain inflation (cereals and pulses), which stood at 18.5 per cent in December 2012, has now come down to 6.7 per cent.
As on September 30, 2013, cumulative rainfall in India was 6 per cent above normal. Good monsoon not only helped in yielding a higher kharif output but also raised the groundwater level which bodes well for the rabi season. "The magnitude of monsoon rainfall in 2013 for the country as a whole was at a six-year high. Also, the rise in MSP of wheat and rice is fairly limited this year at about 4-5 per cent," says Aditi Nayar, Senior Economist, ICRA.
However, vegetable prices continue to remain high and be a cause for concern. Prices jumped 14.4 per cent in December 2012, reached a peak inflation of 95 per cent in November 2013 before easing to 57.3 per cent last month.
Indeed, vegetable prices are not impacted by rainfall and are mostly impacted by supply side issues. Short-term mismatch between demand and supply causes a sharp surge in prices. These shocks can be managed only by addressing the supply-side constraints which includes improving back-end infrastructure such as cold storage and processing facilities. It appears that the government has not done anything recently to address supply-side concerns and that could keep prices under pressure.
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