The corresponding figure of 2.53 per cent last year was 7.6 per cent. The consumer price index (CPI) for industrial workers, released earlier this week, also showed a downward trend, as it came down from 8.4 per cent in April to 7.7 per cent in May. In May 1998, the CPI was 10.5 per cent.

National Institute of Public Finance & Policy professor DK Shrivastava attributed it to a decline in food prices as a result of good agricultural production. Its impact on the inflation rate, however, may be temporary, he added.

For long-term impact on inflation, he said, we have to see money supply in relation to the growth of output. Money supply is 16-17 per cent and output is 6 per cent. Therefore, he maintained, 10 per cent inflation could beexpected.

``If we make some allowance for monetisation of the system, some of the money can be absorbed, but the rest will lead to inflation. So in the medium-term, 7-8 per cent CPI can be expected,'' Shrivastava said.

But Planning Commission member SP Gupta felt that money supply was not getting reflected in the economy. ``Banks are choosy in lending because they are afraid of NPAs.''

However, with inflation so low, some risk can be taken, he added. Some liquidity can be created, though it may encourage some inflationary trends, Gupta said.

Shrivastava said that there might be a fall in the rate of interest. With WPI so low, the prime lending rate at 15-16 per cent is very high.

He also said that the fall in agricultural prices may lead to low investments in the farm sector and there was a possibility of negative effect on the next year's production.

Gupta, however, felt that a lot depends on non-economic factors. For instance, he added, if the outcome of Kargil was favourable, investments may begood in the next year.

According to official sources, the current low WPI may not be sustainable, and a realistic underlying trend for the next five years would be 5 to 6 per cent. Even that would be creditable, if achieved.

The encouraging inflation figures follow a series of other data showing an improvement in the economy despite Kargil developments and political uncertainty. The GDP rate of the first quarter and May export figures also pointed towards rising industrial production and end to the three-year slowdown.