By Ruma Dubey

“It is critical to look through any transient effects, including these base effects, which could temporarily soften headline inflation during 2014,”

These were the precise words of RBI Governor, Raghuram Rajan when he had last presented the Credit Policy in June. He knew, seasonally, there would be a fall in prices and that the fall would look all the more pronounced because of the higher base effect. Yet, he had warned that despite these factors, one would need to look beyond these short term occurrences.

That more or less highlights what one can expect from the Governor on 30^th July. Surely yesterday’s fall in CPI and WPI, might be a small moment to celebrate but that’s about it – just a moment not a period of low prices. Rajan could not have been more clear – expect no rate cuts just because a few months show lower inflation.

Consumer Price Inflation (CPI) for June’14 came in at 7.3%, the lowest since Jan’12 while Wholesale Price Index (WPI) was at a 4-month low at 5.43%. We all know that this number does not contain updated information when it comes to fuel and the basket of products contains a lot of products which are outdated. Food prices have come down MoM and that too comes as a shocker given the fact that we all are actually paying much more than what we did earlier. Clearly, the food basket has items which do have not much relevance.

A quick look into the inflation internals

WPI for June’14 (MoM)

• Core inflation at 5.43% v/s 6.01% (YoY it has gone up from 5.16%)
• Primary articles at 6.84% v/s 8.58%
• Manufacturing products inflation at 3.6% v/s 3.55%
• Food articles at 8.14% v/s 9.5%
• Non food articles at 3.49% v/s 4.94%
• Fuel and power at 9.04% v/s 10.53%

In the WPI, vegetable prices fell by a good 5.89% v/s fall of 0.97% in May. But price of rice, pulses, potato, fruits, milk have risen. What contributed to the fall in food articles were tea (3%), ragi and barley (2% each) and gram, wheat, bajra, jowar and moong (1%).

CPI for June’14 (MoM)

• Core inflation at 7.31% v/s 8.28%
• Rural inflation at 7.72% v/s 8.86%
• Urban inflation at 6.82% v/s 7.55%
• Food and beverages at 7.97%v/s 9.56%
• Fuel and light at 4.58% v/s 5.07%

Interestingly, the Govt also gives us a state-wise breakup of CPI and Meghalaya has the highest combined CPI while Manipur has the lowest. Kerala and Tamil Nadu are much higher than Maharashtra and UP.

Well, it was the 5.6% drop in vegetable prices which kept a leash on the overall food price index. MoM, it is up but it is marginal and that comes as a surprise.  But one has to remember that this is a transient number, with a drought like situation in the country, clearly, food prices will only go up further. Food inflation will have a ride on a hot air balloon. More is the fuel added, more will the balloon soar high. RBI is like the wind, it is trying its level best to blow hard and squelch down the burning fire and pull the balloon down. Unfortunately, the wind is stoking up the fire further, making visibility ahead very blurred.

Fuel and power costs are down. One cannot help but feel baffled as one continues to pay much more than earlier. This is again on account of outdated data. Naptha and furnace oil prices have been cut and that is also probably what has brought in this fall in fuel prices.

Undoubtedly, there is cause for worry. With no rain clouds looming on the horizon over parched India, clouds of drought could cast a shadow over all the current optimism. Demand will get stoked up with the measures being taken by the Govt, yet, if rain fails, no economic measure will really pump up demand, especially rural demand.

Indian inflation remains the fastest in the BRIC group and the weakest monsoon rains in a couple of year threatens to further aggravate the falling growth situation as rural income is sure to take a hit and food prices will go up. RBI is not going to cut rates in a hurry any time now. Maybe if Modi sarkar helps fuel demand, maybe then we could see growth comeback. Or else, we can sit back and watch the dance of inflation and growth while our savings dwindle.

Things look good as of now but look sky wards for rain gods and hope they help sustain this ‘half full’ glass sentiments.