El Niño worries inflation managers

RBI has decided to consider inflation based on new series CPI in which half of the weight is for food, beverages and tobacco

Worries of an El Niño effect this monsoon are an added complication for the Reserve Bank’s task of managing of inflation.

Arising from a weather change in the Pacific Ocean every few years, the effect of an El Niño on this part of the world is to to hit the average rainfall, triggering problems in grain output. A private sector weather forecaster, Skymet, and some global forecasters have already issued warnings for this year that this could happen. RBI has decided to consider inflation based on the new series of the Consumer Price Index, where the weight of agricultural crops is around 40 per cent. Any possibility of crop damage will mean a spike in commodity prices and resulting spurt in food inflation.

Skymet says there’s a 25 per cent chance of India facing a drought this year, due to the El Niño effect. Indranil Sen Gupta, India economist at DSP Merrill Lynch, agrees there is such a risk this year.The government weather forecasting agency, India Meteorological Department, is expected to announce its forecasts in a day or two.

According to the Skymet analysis, the gravity of impact in north-west and west India could be higher than in earlier  El Niño years. Sugarcane, oilseeds and milk are some of the big products in these regions.

The Dhanya Index of the National Commodities and Derivatives Exchange has risen 2.6 per cent in the past fortnight since the initial forecasts of an  El Niño started coming. Rice and maize are major kharif crops in the cereals (dhanya) segment.

The prices of pulses have been lower due to a huge crop but the comfort might not last for long, as it is import-dependent and Australia, one of the biggest suppliers, has warned it faces an  El Niño threat. Rice, our largest agri-export, wouldn’t remain unaffected if rain is less or even delayed.

Jatin Singh, founder and chief executive officer of Skymet, said, “We are expecting a deficit rainfall in many subdivisions in northwest and west-central India. This is means moisture distress in parts of Rajasthan, MP, Maharashtra and especially Gujarat, which could lower milk production significantly. Any delay in the monsoon advance after June 10 could cause soyabean prices to spiral, as sowing will get delayed. This year, we think both east and west MP are vulnerable.” This might also happen for groundnut, a major crop for Gujarat.

Vegetables, in any case, always are prey to monsoon vagaries. As for sugarcane, Singh says, “UP cane is irrigated and won’t have that much of an adverse impact.  But we are expecting below normal rainfall in parts of Maharashtra and north interior Karnataka.  In 2009 (a drought year)  and 2012 (a deficit year), sugar prices spiked by 15-20 per cent. This year could be similar.”