A weak monsoon won’t alter RBI’s basic outlook

While the magnitude of the rain setback may not be too large, its impact on inflation is what macro policymakers are watching out for. (AP)
While the magnitude of the rain setback may not be too large, its impact on inflation is what macro policymakers are watching out for. (AP)


A shortfall in rainfall raises inflation risks even as crude oil prices add pressure. India’s central bank is unlikely to shift policy course. It cannot afford to signal a premature pivot

Rainfall during the monsoon from June to September has turned out weak, but not too short of India’s official forecast. Our met department had predicted ‘normal’ rainfall, which is defined as anywhere between 96% and 104% of the long-term average. This year’s precipitation, at 94.4%, was close to the lower mark, although still ‘below normal.’ Considering that El Niño had led to drier than usual conditions in Asia and past episodes of this tilt-away in Pacific warmth have seen outright droughts, we may actually have gotten away lightly. The shortfall could have been worse. Still, the high dependence of Indian agriculture on rain has caused some anxiety over the adequacy of our farm output. While kharif crops of summer (like rice) are directly rain-fed, mostly, many post-winter rabi harvests draw upon water reserves refilled by the monsoon. What also matters is how well the rainfall is spread across time and space. This year, it was both erratic in its progress over the season, with sharp monthly swings—July was bountiful, August painfully dry and September a relief—and uneven in its sweep across India’s landmass. Kharif crops could be hit, with our rabi performance at some risk as well.

While the magnitude of the rain setback may not be too large, its impact on inflation is what macro policymakers are watching out for. Recent data showed retail inflation at 6.8% in August, compared to prices a year earlier. Though it was a dip from July’s 15-month high of 7.4%, it was well above the 6% upper bound of the Reserve Bank of India’s (RBI) target band. Food prices have been a particular cause for worry in keeping the cost-of-living down, with those of cereals and pulses going up at double-digit rates and vegetables undergoing spikes (like tomatoes recently). The supply of some farm commodities was judged to be so tight that the government has resorted to a clutch of export curbs and other restrictions. The deleterious effect over time of such heavy intervention aside, domestic availability could receive an instant boost that may help cool prices. Other cost push-ups in the economy’s matrix, however, have added complexity to the inflation outlook. Most acutely, crude oil prices hovering above $90 per barrel globally have upped the risk of a generalized spurt in costs, a break-out of which would test projections of inflation that look through food blips (as transient) but assume calm oil. In such a scenario, farm supply deficiencies—the Achilles Heel of our price-stability defence—would be bad news. If both our summer and winter harvests disappoint, RBI’s challenge will steepen.

For an RBI committed to keeping an Arjuna’s Eye on its central target of 4% retail inflation, the final monsoon data should translate to even more caution on shifting stance. The central bank’s withdrawal of accommodation has been on pause, and an upward revision looks likely in its inflation forecast for 2023-24 as it reviews its monetary policy this week. A notch-up in its last prediction of 5.4% would put it within a whisker of 6%. Since RBI had made it clear that its pause need not end in a pivot (and a neutral stance looks even further away), last week’s confirmation of a rain shortfall need not alter its broad outlook. Taken together with the US Federal Reserve’s hawkish talk (and its likely rate hike after a wait-and-watch pause), it would serve RBI’s cause well to re-state clearly what an accommodative policy is, and why it may not yet be done with its post-pandemic pullback.

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