Monsoon to be critical factor for monetary policy: Barclays

Projects retail inflation below 8% if official rain forecasts come true

The southwest monsoon, which hit the mainland a bit late today is a "crucial variable" for monetary policy, British brokerage Barclays said today and projected retail inflation would be below 8% if official rain forecasts come true.

Such an eventuality will help give the RBI, which is targeting to rein in retail inflation at 8 percent by January next, greater room for a "balanced monetary policy stance", it said.

"For the RBI, the monsoons will be a crucial variable in calibrating monetary policy, as the rains will have implications for both inflation and growth," it said in a note.

The monsoon, which generally hits the southern coast on June 1, made a landfall at the Kerala coast earlier today.

The Met Department has said the rains will be 95% normal this year and it is likely to revise its estimate later this month according to the movement of the rainfall.

"We expect retail inflation-the RBI's key focus at the moment - to be in a low 7 percent handle, on average, in FY15," Barclays said, adding, its projection was based on the Indian Meteorological Department's estimate.

The likely fall in inflation, coupled with stability in the rupee and a limited pick up in growth may lead RBI to be more balanced in its monetary policy making, it said.

"With a likely softer inflation trajectory, a largely stable outlook for the rupee and only a limited uptick in growth momentum, we think there would be greater room for a more balanced monetary policy stance," it said.

The RBI has been repeatedly saying it will balance out concerns between the sagging growth and inflation even though it considers reining in the prices as a key objective.

The RBI has raised its key rates three times ever since Governor Raghuram Rajan took charge last September but took some growth-oriented measures like the decision to lower the statutory liquidity ratio, which is likely to release an additional Rs 40,000 crore for lending.

Even though it held on to its key lending rate, the announcement on the SLR in the last policy on June 3 has led analysts to call the move "dovish".