Mumbai: The wholesale price index on food inflation eased significantly for the third straight week, while the year-on-year rate of food inflation fell to its lowest level in almost four months. This boosted sentiment in the markets, as they bottomed out after the inflation data.

Source: Office of the Economic Advisor

The index for food articles has been declining gradually week after week, falling from a high of 202.2 for the week ended 22 October to 198.5 for the week to 12 November. Year-on-year, the rate of food inflation slowed to 9.01% for the week ended November 12, down from 10.63% reported in the previous week according to the government data released on Thursday.

At first glance, the primary food articles index fell 0.7%, to 198.5 because of the falling prices of protein based products. Additionally, the kharif harvest which has come in is also helping. Anubhuti Sahay, economist from Standard Chartered Bank said, “In the kharif season, weather conditions are favourable which causes the prices of several vegetables to come down."

Headline inflation will also enjoy the elevated base effect from last year as onion prices had skyrocketed in November and December. Besides the base effect kicking in, there are clear signs of growth slowing down. “We are seeing signs growth moderation, next week the numbers for second quarter GDP will be published, which may show a sharp slide to 6.9% from 7.7% in the previous quarter. This will bring down demand for noon-food items," said Sahay.

Not just India, but growth is slowing down across the globe, which will bring down core inflation. This would eventually ease pressure on commodities. Economies across the world are seeing a hard landing. China’s manufacturing purchase managers index fell to a 30 month low of 48, a reading below 50 indicates contraction. Also third quarter growth in the United States was revised downwards to 2% from 2.6% earlier.

Brent crude is down 1.3% in the past month and is hovering around $107.82 per barrel. Manufacturing inflation will decelerate if crude declines further, said economists. So should the markets start hoping that lower inflation will mean a reduction in interest rates by the Reserve Bank of India, perhaps as early as in the first quarter of FY13?

Headwinds to 7% inflation target for FY12:

Earlier this week, RBI governor, Duvvuri Subbarao said, “Even in the face of such structural changes in dietary habits, inflation is not inevitable. The reason structural changes have triggered inflation in India is that the supply response in respect of most protein items has not been adequate."

Sahay said, “Food prices may not correct to pre-2007 level as supply side constraints will always be there. It has been three days since the winter session of parliament has commenced, but nothing has come out of it. Lack of policy measures and slowing investment demand will weigh on supplies."

Also, slowing global growth may have taken some sheen off the commodity prices but a depreciating rupee which has fallen over 14% year to date may stoke inflation because India exports over 90% of its crude requirement.

While the falling trend in the index of food articles is therefore heartening, it may be too soon for the markets to start celebrating.