A below-the-average southwest monsoon this year, as is the case till 13 September (5 percent below the long-term average), shouldn’t press the panic button, after two consecutive drought years.
So far, rain distribution has been fairly reasonable this year. The Indian Meteorological Department (IMD) isn’t too off-the mark in their forecast of the rain distribution in 2016, even with an error of 4-5 percent minus the long-term average. So hold on for a while before blaming the IMD. The good thing this year has been that pulse inflation, which has higher weight in the consumer price inflation (CPI) basket, has shown an easing trend. That’s a big relief.
Good pulse production
Pulse prices have been a key issue in the overall inflation story in the recent past. The Deccan region, the major pulse cultivating area, has received good rainfall.
Economists too aren’t worried about the rain pattern this year, even with the risks of deficient monsoons. In the case of Punjab and Haryana, the major agrarian states, the rains have been less in certain areas but that doesn’t matter much since these states are one of the most irrigated in the country. “We believe that since these both the states are the most-irrigated states of India (more than 90 percent of total crop area is irrigated), the impact of deficit rains would be insignificant. Cereal prices may be impacted, though with the new crop scheduled to arrive in the market from October-November the impact on cereal prices will not be significant,” SBI economists said in a note.
D K Joshi, chief economist at rating agency, Crisil, said, “On the whole, a five percent deficient monsoon this year is equal to normal. There is no real reason to worry,’ he said. That view is shared by Radhika Rao, economist at Singapore-based DBS bank too. “Even as monsoon scales back, there is no imminent concern,” Rao said in a recent note. “Replenishment of reservoir levels has been encouraging, which in turn is positive for availability of ground water and farm output. By late-August, overall reservoir storage position stood at 114 percent vs same period last year and 99 percent of storage of average of last ten years. This is a notable improvement from June when storage levels trailed at 55 percent of last year’s levels and way below the ten-year average,’ Rao said.
Rao also cites a notable improvement in the sowing pattern this year, "with the total area sown, up 4 percent from the same period year ago, led by a sharp increase in pulses (36 percent YoY), rice (14 percent), cereals and oilseeds. This marks a pick-up from a 23 percent decline in total area sown by late-June. These trends are relevant in light of the recent pick-up in CPI inflation (primarily food inflation) and expectations of better agricultural production lifting GDP growth this year." So, one can safely assume the point here is even though the IMD’s initial forecast of 106 percent rains in 2016 goes a tad wrong, one needn’t press the panic button.
RBI rate cut?
The CPI inflation was a pleasant surprise in August with a drop to 5.1 percent compared with 6.07 percent in July, offering some relief to the central bank and hope to the rate cut lobby. Most economists are of the view that food and vegetable prices, which have been the problematic area in the overall inflation story, will continue on an easing trend enabling further decline in the CPI inflation. If that happens, there is a good chance that the Reserve Bank of India (RBI) will meet its March, 2017 target of 5 percent. If the central bank is confident of this trajectory, it wouldn’t hesitate to cut the key interest rates by end of this year by 25-50 basis points. One basis point is one hundredth of a percentage point.
But, things aren’t all smooth too. The upside risks can come from a few factors. 1) Possible unseasonal rains, 2) the looming uncertainty surrounding the US Federal reserve rate hike, and 3) risks of higher consumer demand arising from higher wages to government staff.
The quantum of rate cut depends on how the central bank perceives these risks and what sort of feelers it will receive from the government to reduce interest rates.
At least rains aren’t a worry this year.