April WPI inflation eases, but monsoon risk could push prices higher

By Rajesh Kumar Singh NEW DELHI (Reuters) – Wholesale inflation eased in April thanks to lower food prices, but the threat of a below-average monsoon in the coming months will fuel price pressures that will pose further challenges to the new government. Wholesale prices rose a slower-than-expected 5.20 percent in April as a nearly 18 percent fall in onion prices since March slowed food inflation to 8.64 percent from 9.90 percent in March. The data comes days after consumer inflation hit a three-month high of 8.59 percent in April and industrial output fell for the second straight month in March. India is facing the threat of low rainfall due to a possible El Niño weather event, which affects wind patterns and can trigger both floods and droughts. A strong El Niño in India could result in lower production of summer crops such as rice, sugarcane and oilseeds. “The likelihood of a sustained improvement in the food price index looks unlikely in the coming months,” warned Shakti Satapathy, fixed income strategist at AK Capital in Mumbai. A new government will take power after the results of the five-week-long general election are announced on Friday. The BSE Sensex and the broader Nifty have risen to an all-time high and the rupee has posted its biggest rise in 10 months after polls showed opposition candidate Narendra Modi's Bharatiya Janata Party (BJP) and its allies would win a majority in the elections. A victory for a BJP-led coalition is likely to lay the foundation for a revival of confidence and investment in Asia's third-largest economy, which is battling its worst recession since the 1980s. While gross domestic product growth has almost halved over the past two years, falling to less than 5 percent, inflation is averaging nearly 10 percent, well beyond the Reserve Bank of India's comfort zone. The RBI aims to bring down consumer inflation to 8 percent by the end of March 2015 and 6 percent by March 2016, and RBI Governor Raghuram Rajan said on Thursday he was “very happy” with that target. MARKETS RALLY Persistent weak growth and high inflation are a dilemma for the RBI ahead of its monetary policy meeting on June 3. The central bank sees price stability as a necessary condition for sustainable growth and has raised the policy rate three times since last September. But further rate hikes risk deepening the economic slowdown. Dariusz Kowalczyk, an economist at Credit Agricole in Hong Kong, said the WPI readings should boost capital inflows into India's equity and bond markets and support the rupee, which hit a near 10-month high of 59.28 against the dollar after the data was released. “We continue to expect a short-term upside for the currency ahead of election results on Friday night, although gains will be limited by RBI interventions,” Kowalczyk said. The Nifty has gained nearly 22 percent since Sept. 13, when Modi was named the BJP's prime ministerial candidate on hopes he would end political deadlock in New Delhi and speed up reforms. But an economic recovery depends on whether the new government can bring inflation under control and revive capital investment, which probably grew at its slowest pace in 11 years in the fiscal year ended March. These two factors have been the main tarnish to outgoing Prime Minister Manmohan Singh's economic track record, leading some analysts to warn financial markets against rushing into action. “To capitalize on current market momentum and investor confidence, Modi needs to urgently implement sweeping reforms, a process that could potentially prove painful,” said Tom Elliott, senior analyst at financial advisory firm deVere Group in London. (Additional reporting by Manoj Kumar in SHIMLA; Editing by Jacqueline Wong and Robert Birsel)