India's April inflation readings will not make the Reserve Bank of India's (RBI) job any easier. Yoy inflation in April per the wholesale price index (WPI) of 4.9% was the lowest reading since November 2009. Consumer price index (CPI) inflation also declined to 9.4% in April from 10.4% in March, and marked a 14 month low.
The RBI cuts its monetary policy rate - the repo rate - by 25 bp to 7.25% on 3 May. Depending upon which inflation measure you use, the real policy rate in India is negative 2.1% (CPI) or positive 2.4% (WPI). To be fair, the RBI's guidance on future monetary policy action was hawkish given sticky CPI inflation. For further details on why this disconnect matters, refer India's Inflation Disconnect.
The divergence can partly be explained by the higher weighting of food and food products in the CPI (46%) versus the WPI (24%), as well as CPI food inflation running higher than WPI food inflation (4-6% over the past few months). Food inflation has been running higher than headline inflation for both the indexes - CPI food inflation was 10.7% in April while WPI food inflation was 6.3%. If we input food WPI into CPI (instead of food CPI), headline CPI in April would have been only 7.2% (a good 2.2% lower). 
That said, core inflation per the CPI is also much higher than the WPI. Core CPI inflation (excluding food and fuel) declined to 8.1% in April from 8.6% in March, while core WPI inflation (manufactured products excluding food) had a much sharper decline to 2.8% from 3.5%. 
Looking ahead, food inflation trends would be key for both the WPI and the CPI in my view. Core WPI manufacturing inflation should stay contained at close to 3% as there hasn't been any significant pass through of higher fuel prices so far suggesting muted pricing power. Higher expected diesel and electricity prices should keep fuel & power inflation above 10%. As such, food prices would be the key variable.
Yoy WPI food inflation (primary food articles and manufactured food products) declined to 6.3% in April from a near term peak of 11.0% in January. CPI food inflation also declined to 10.7% from 13.2% over the same period.
However, seasonally adjusted numbers for WPI primary food articles suggest inflation of close to 20% (based on a three month moving average) versus the yoy rate of 6.1% (primary food articles drive WPI food inflation because of their higher weighting). As such, even assuming a significant slowdown in seasonally adjusted food inflation trends would imply much higher yoy WPI food inflation post September 2013.
A normal Monsoon (which the Meteorology Department is predicting) would be helpful in keeping a lid on food prices. Separately, the government also needs to constrain the usual double digit increase in minimum support prices (MSPs) paid to farmers for key crops (may be tough with central government elections in 2014). With food prices again taking the driver's seat for inflation, monetary policy would be dependent on the monsoon and MSPs.
