Poor rains may dash rate cut hopes
The prediction of a below-normal monsoon for the second year, after a lingering bad winter of hailstorms and unseasonal rains, could bring back the spectre of high food prices.business Updated: Apr 22, 2015 23:37 IST
The prediction of a below-normal monsoon for the second year, after a lingering bad winter of hailstorms and unseasonal rains, could bring back the spectre of high food prices.
India's retail inflation rate has fallen to a three-month low of 5.17% in March from 5.37% in the previous month. Food inflation, a measure of how costly the platter has become over a 12-month period, rose at a slower 6.14% in March from 6.88% in the previous month.
An unusually dry summer, however, can very rapidly push the inflation rate above the Reserve Bank of India's (RBI's) tolerable threshold level of 6%.
"That will mean the RBI's inflation target of 6% by March 31, 2016, gets breached. Also the RBI will have less leeway to continue its current easing cycle," credit rating firm Crisil said in a recent report.
The RBI, which kept key rates unchanged in its monetary policy review earlier this month, had indicated it will closely observe the trends in food inflation. It will keep a close watch, particularly in the context of severe damage to crops caused by an unseasonal spell of hailstorms across several states, which has devastated ripening winter-sown crops and delayed harvests as also this year's summer rain.
A bad winter crop could aggravate shortages. Already, India looks set to contend with a reduced winter harvest, which could cut up to 20% of the country's wheat output, besides 30% of mango plantations, and cause damages to other food crops.
The probability of a poor monsoon is due to a brewing El Nino, a weather glitch marked by higher-than-normal Pacific temperatures. Since the effects of El Nino ripple around the world, analysts expect a rise in global commodity prices.
El Nino conditions can set off milder winters in northern US, heavier rains in Brazil and dry spells in India. Such widespread effects can roil agricultural markets across continents.
"El Nino is a global phenomenon. It could affect global commodities, not just India's. My guess is, there is a risk to food inflation," said NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy.
Risks of food prices going up are somewhat higher this summer, when the impact of unseasonal rains is expected to be felt. Since the week starting February 25, the country recorded excess rainfall. Rains were 105% above normal between March 1 and 25. Most of northwest and central India received surplus rains.
"Inflation readings in May and June are likely to more accurately reflect the real picture. Vegetable prices could increase by 20-30% in the next three months, pushing retail food inflation up from 6.8% in February to 10% by June," said Sonal Varma, an economist with investment firm Nomura.