NEW DELHI (Reuters) - India's wholesale inflation eased in April helped by a moderation in food prices, but the threat of a below-average monsoon this summer will fan price pressures again that will compound challenges for the country's incoming government.
Wholesale prices in April rose a slower-than-expected 5.20 percent, as a nearly 18 percent drop in onion prices since March slowed down food inflation to 8.64 percent from 9.90 percent in March.
The data comes days after after consumer inflation hit a three-month high of 8.59 percent in April and industrial production posted a second straight contraction in March.
India is facing prospects of poor rainfall this summer due to a possible El Nino weather event that affects wind patterns and can trigger both floods and drought. A strong El Nino in India could trigger lower production of summer crops such as rice, sugarcane and oilseeds.
"The probability of a consistent improvement in food prices index seems unlikely in the coming months," warned Shakti Satapathy, a fixed income strategist at AK Capital in Mumbai.
A new government is set to take over in New Delhi after results of a five-week long gruelling national election are declared on Friday.
The benchmark BSE Sensex and the broader Nifty have surged to a life-time high and the rupee rallied to its strongest in 10 months after exit polls showed opposition challenger Narendra Modi's Bharatiya Janata Party (BJP) and its allies winning a majority in the elections.
A win for a BJP-led coalition is expected to set the stage for a revival in confidence and investment in Asia's third-largest economy, battling its worst slowdown since the 1980s.
While GDP growth has almost halved to under 5 percent in the past two years, inflation has been averaging nearly 10 percent, way above the Reserve Bank of India's comfort zone.
Persistently weak growth and high inflation are a predicament for the Reserve Bank of India (RBI) ahead of a policy meeting on June 3.
The RBI considers price stability a necessary condition for sustainable growth and has raised interest rates thrice since last September. But further rate increases run the risk of deepening the economic slowdown.
Dariusz Kowalczyk, an economist at Credit Agricole in Hong Kong, reckons the WPI readings will boost capital inflows into India's equity and debt markets and shore up the rupee, which hit a near 10-month high of 59.28 on the dollar after the data.
"We continue to expect near-term upside for the currency ahead of the Friday night election results, although gains will be limited by RBI interventions," Kowalczyk said.
The Nifty has gained nearly 22 percent since Sept. 13 when Modi was named as the BJP's prime ministerial candidate on hopes he will end a policy logjam in New Delhi and fast-track pending reforms.
An economic revival, however, depends on the new government's success in controlling inflation and reviving capital investments, which probably grew at their slowest pace in 11 years in the fiscal year that ended in March.
These two factors have mainly tarnished the economic track-record of outgoing Prime Minister Manmohan Singh. As a result, some analysts are cautioning financial markets against getting ahead of themselves.
"As such, in order to capitalise on the current market momentum and investor confidence, Modi will urgently need to implement far-reaching reforms, a process that could potentially prove to be painful," said Tom Elliott, a senior analyst at financial advisory firm deVere Group in London.
Editing by Jacqueline Wong