June inflation at lowest in 30 months: Guess what? It's still bad news

India’s retail inflation eased to 7.3 percent in June, the lowest since 2011 due to fall in food prices, which carries about half the weight in the CPI basket while Wholesale Price Inflation (WPI) also surprised on the downside(5.4% year on year vs. 6 % in May) led by weaker food and fuel inflation.

While the dip in vegetable and fuel prices along with double-digit growth in car sales and better industrial production in May does provide some respite for the economy, the battle against inflation is far from over. Here’s why:

All India crop sowing is more than 50 percent less when compared to last year: Concerns over monsoon have only crystallised over the past six weeks with a delayed onset and substantial rainfall deficit. Indiahas a monsoon rain deficit of 41 percent with some sub-divisions running an even higher shortfall.Add to that thedeclining reservoir levels which have delayed sowing of all major kharif crops other than sugarcane and jute.

Care Ratings has highlighted that as of 11 July 2014, the all India crop sowing stood at 256.61 lakh hectares, which is 51% lower than year ago levels.

The sowing pattern of the major kharif crops so far shows that there has been a significant drop in the sown area for oilseeds (84%), coarse cereals (63%), pulses (48%), cotton (51%) and rice (22%) when compared with year ago sowing levels. ( See chart above)

“Such trends would impact the price and availability of food items as well as critical inputs for various sectors such as food-processing, textiles, rubber etc. in the coming months,” noted rating agency ICRA.

Government action to have limited impact:On its part, the government has already enacted various measures to target food inflation such as clamping down on hoarders, fixing minimum export price for onions and potatoes and delisting of fruits and vegetable from APMC. According to Kavita Chacko, economist atrating agency CARE, this can help control prices to an extent but going forward these measures could have limited impact on rising food prices as these do not effectively address the supply shortages aggravated by sub-normal monsoons.

“Both CPI and WPI inflation came in lower-than-expected due to weaker food and fuel price inflation. This is positive news. If inflation continues at this rate, the RBI will be able to achieve its target of 8% inflation by year-end. However, risks to inflation including from poor monsoons remain with us and could halt the recent downtrend in prices. This is where the government needs to step in with more fire power,” said Frederic Neumann, Co-head of Asian Economics Research at HSBC in a note.

Reading between the lines, do not expect RBI governor Raghuram Rajan torelent on interest rates any time soon.On the contrary, if food prices shoot up due to a deficient monsoon,rise in interest rates can’t be ruled out.