Lower inflation likely in coming months

Headline inflation is the lead story here, as it has registered the lowest tally in nine months, thanks to relatively low food prices, gas (electricity) tariffs, and rebasing. Although the Consumer Price Index (CPI) on monthly basis increased by 1.1 percent in April, the low base effect did the trick by posting a year on year growth of 5.8 percent. And this trend may continue in next month, bringing CPI further down.
Ten-month inflation is standing at 7.75 percent and may fall further; below 7.5 percent by the end of this fiscal year. That is going to be well below the annual target of 9.5 percent. Core inflation is on a downward trajectory as well, but lagging behind the fall in CPI as the food and oil prices deceleration supersedes other goods and services.
Still trimmed core inflation came down sharply to 7.6 percent this month as compared to 8.4 percent in the previous month. While the core inflation stood at 8.7 percent in April and it may fall further in coming months. This is lower than the prevailing policy rate of 9.5 percent. The prime reason for falling core inflation is subdued housing, water, electricity, gas and fuel sub indices. The non-food, non-oil index increased by a mere 3.67 YoY in April, despite an increase of 1.1 percent over the previous month.
This trend is very encouraging, implying that inflation may come down further next year. A similar tale is in offing for the transportation and communication sub index owing to low oil prices and competition in the cellular market, respectively.
On the other hand, clothing and footwear and health indices exhibited double-digit growth. Hike in former is attributable to firm cotton prices in the previous year and may revert with its lagging trend to raw material prices which fell last year while some government attention is required to put reins on the health prices.
The good omen is that wholesale price index is declining in tandem to CPI as WPI was at 6.8 percent in April compared to 7.9 percent in the previous month. This is implying lack of pressure on headline inflation in coming months.The overall falling trend in prices may lure the central bank to go for further easing in the monetary policy next month. However, persistent pressure on the Balance of Payments, amid rupee flirting around century mark against USD may keep the doves at bay at the central bank.
In a nutshell, the vibes of reversal in policy stance may come to halt for time being.