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Interest rate cut brings ray of hope, but cloud over growth prospects

business Updated: Jun 03, 2015 10:36 IST
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India may be staring at its first drought in six years with the government downgrading the monsoon forecast on Tuesday, sparking concerns about growth in Asia’s third-largest economy as it recovers from its worst slowdown in 25 years.

The weather office cut this year's monsoon forecast to 88% of the long-term average from a previous prediction of 93%, because of an intensifying El Nino weather pattern, as Reserve Bank of India governor Raghuram Rajan warned that the biggest uncertainty ahead was the outcome of the annual monsoon.

“Each path of the sequence is fraught with uncertainty. So we need to figure out how this plays out. And, clearly government action is very important,” Rajan said after the central bank's policy meeting on Tuesday.

"Going forward, the room may absolutely open up if monsoon is better than expected or government action can mitigate any potential rise in food prices and if energy prices stay contained."

The forecast of a below average monsoon and the RBI’s cautious stance on the economy spooked markets and the benchmark Sensex plunged over 600 points even though the RBI cut interest rates for a third time this year on the back of easing inflation, and left open the possibility of further cuts later this year.

Read: Sensex tanks 661 pts on RBI's cautious stance, drought fears

Millions of Indians are pinning their hopes on falling interest rates, but a poor monsoon could be a dampener as it will dent incomes in the countryside and cut spending by farmers, already grappling with the impact of unseasonal rain and hailstorms in February and March.

The country’s 700 million farmers are heavily dependent on the four-month-long monsoon that runs from June to September. Any shortfall can have a direct bearing on spending on consumer goods from soaps to two-wheelers.

Anger is already growing in the countryside after rain and hail-ravaged farms, driving many debt-laden farmers to suicide. The onset of the monsoon has already been delayed by about five days, and the forecast of a deficient monsoon has sparked memories of 2009 when El Nino brought the worst drought in four decades to India.

"It will delay sowing, raise our irrigation costs and could blight our crops," said Dharmendra Kumar, a farmer in Uttar Pradesh. "And as we've experienced in the past, it'll be too late by the time government help reaches us."

But chief economic advisor Arvind Subramanian allayed fears about inflation, and said the government would step in to tackle a rise in prices.

"These cuts are consistent with the trends in the economy, including strongly declining inflation, contained current account deficit and ongoing strong fiscal discipline," Subramanian told reporters.


Monsoon rains delayed, to arrive by June 5

Fresh farm worry as El Nino sets in, cloud over monsoon