Inflation worries recede as IMD predicts normal monsoon

If the distribution and spatial breakup is normal, it bodes well for food production

The India Meteorological Department’s (IMD) prediction of normal monsoon is likely to assuage fears of spike in food inflation and El Niño’s impact on rainfall.

While this is a preliminary forecast, IMD will issue an updated forecast in June. If the distribution and spatial breakup is normal, as IMD expects, it bodes well for food production and as a consequence food inflation. 

Based on this forecast, economists expect agriculture to grow at three-four per cent in FY18. "Factoring in the expectation that monsoon rainfall would be around 96 per cent of the long-period average (LPA), our baseline expectation is that growth of agricultural GVA would moderate from the above 4 per cent in FY2017 to around 3.6 per cent in FY2018," said Aditi Nayar, principal economist at ICRA. 

"We believe that the agricultural GDP is most likely to be in range of three-four per cent, a tad low compared to the FY17 expectation, if rainfall remains normal," said a report from Economic Research Department of the State Bank of India. 

These projections are likely to ease concerns of lower food output leading to higher food inflation. 

In its recent monetary policy, the Reserve Bank of India (RBI) had highlighted concerns of deficit rainfall impacting food production and as a consequence inflation. "There are upside risks to the baseline projection (of inflation). The main one stems from the uncertainty surrounding the outcome of the south west monsoon in view of the rising probability of an El Niño event around July-August, and its implications for food inflation," it said. 

Retail inflation, measured by the consumer price index (CPI) had edged up to 3.81 per cent in March, from 3.65 per cent in February. 

The RBI has projected CPI inflation to be 4.5 per cent in the first half and 5 per cent in the second half of the current financial year. 

While IMD's initial forecast might prove right, there is reason to be cautious. Last year, in its first forecast, it had predicted rainfall at 106 per cent of the LPA. But actual rains turned out to be lower at 97 per cent of the LPA.