The decline in CPI inflation to 2.18 per cent in May 2017 was all it took for the market to pitch hard for a rate cut once again. The May inflation number is well within the RBI’s projection of 2-3.5 per cent for the first half of this fiscal. There is now a widespread expectation of a prolonged low inflation trend (in fact, a deflation in food) that is making the case for a rate cut stronger. But will the recent trend of falling inflation be sustained?

Probably not. The deflation in food prices in May is unlikely to continue and prices may look up again in the next few months.

Ground-level checks suggest that the recent fall in inflation is in certain pockets and driven by specific reasons that are unlikely to hold for long.

The steady fall in CPI inflation over the past year was led by food, which has a 45 per cent weight in the CPI basket. Food inflation dropped sharply from 7.2 per cent in May 2016 to negative 0.22 per cent in May 2017.

This fall has been led by vegetables and pulses. From 10.8 per cent in May 2016, vegetable inflation was -13.4 per cent in May 2017.

According to Agriculture Ministry estimates, vegetable production was up 3.5 per cent in 2016-17 (2nd estimate) after growing by 1.5 per cent the previous year. This could be one reason for vegetable prices easing since mid-2016. The fall accelerated after demonetisation, began to moderate since February, but declined sharply again in May.

Data given by MOSPI indicates that the fall in prices was led by certain vegetables: onions and potatoes in particular.

For onion production, 2016-17 was a bumper year, thanks to good monsoons. In Madhya Pradesh, which saw farmers taking to the streets in protest, prices of onion fell to about ₹3-4/kg. Ram Singh Thakur, who works with a farmer producer company in the Agar Malwa district in MP, says, “The Centre should tell farmers how much they should sow. Every other year, farmers end up producing in excess.”

Similarly, pulses inflation, which was 31.5 per cent last May, is now -19.45 per cent.

Here too, the problem of plenty is the reason behind the price fall. Production was 22.4 million tonnes in 2016-17, up 37 per cent over 2015-16. Total tur production is estimated to be 4.6 million tonnes, up 80 per cent over the previous year. Imports added to this surplus.

Sunoor Kaul, Director, Origo Commodities, which offers post-harvest solutions and warehouse management services, says, “For a long time imported pulses were stuck at the ports. They have also been coming into the market over the past month”

Offloading of pulses stock by traders has compounded the price fall, according to a member of the APMC in Barshi, Maharashtra. Many believe that traders are selling to empty their stock before GST kicks in.

Dr BV Mehta, Executive Director, Solvent Extractors’ Association of India (SEA) said, “Big traders and manufacturers have reduced their buying and stocking across commodities, due to uncertainty and confusion around GST. They are unsure whether they would be able to claim credit on the tax paid on the stock post July 1.”

The question is whether the fall in prices of vegetables and pulses will continue. Market players feel that once GST is out of the way, buying will resume, sending prices up.