Rainfall conditions deteriorated last week and now are tracking IMD’s seasonal forecast of a 12% shortfall. Cumulative rainfall between 1 June and 27 August was 12% below normal, down from a 9% shortfall last week. The geographic distribution remains similar, with 21 out of 36 regions reporting normal rainfall conditions (22 last week), and another 7 close to normal levels. After a poor July, rainfall in August has also been weak, currently running ~24% below normal.
With almost 80% monsoon season is over, the deficit in rainfall is unlikely to be filled, and even if remaining weeks have normal rainfall, the deficit is likely to remain close to 9%. The Indian Meteorological Department (IMD) has maintained its forecast of a 12% shortfall in rainfall for the season, and the outcome has now hit that shortfall. But the impact on food inflation seems to be mitigated so far, with only onion prices showing signs of increase, and other commodities are broadly contained. Overall sowing activity during the kharif (summer) season however continues to moderate; as of 21 August, sowing was up ~1% relative to 2014.
The recent drop in CPI inflation should help to assuage inflationary concerns at the central bank (see India: CPI moves sharply lower on commodity prices, 12 August 2015). In its latest monetary policy statement in early August, the Reserve Bank of India (RBI) noted that risks to inflation are “balanced”, and the governor recently noted that the government’s management of food prices has been good. In that context, we think the lack of an increase in MSPs in mid-July for the summer crops will help keep food inflation better anchored, as MSPs become valid from October 2015 onwards. The recent increase in onion prices is also being offset by drop in the prices of other vegetables, and recent imports from Egypt should help to keep a lid on onion prices. We forecast FY 15-16 average CPI inflation of 5%. We believe the central bank is on course to cut the repo rate 25bp in H2 15, unless incoming data – for example, the monsoon – spring major negative surprises in the coming weeks. The monsoon trend will be clear by September. On the balance of risks, although another inter-meeting rate cut cannot be completely discounted, our expectation is tilted towards a rate cut at the RBI’s next meeting at end-September. Recent volatility in the INR due to the weakening of the CNY by the PBoC is also likely to be a hurdle for an earlier rate cut. Therefore, although the RBI has reiterated that its policy actions will remain data dependent, our forecast remains a 25bp repo rate cut in September.