Rajan says forecast of below-normal monsoon biggest worry now

Flagging the forecast of below-normal monsoons as the biggest risk facing the economy, Reserve Bank Governor Raghuram Rajan today said prudent measures by the government can help reduce its impact.
"Clearly, the biggest uncertainty at this time is the outturn of the monsoons," Rajan told reporters hours before the Met Department came out with forecast of 88 per cent monsoons rain.
The Met department has revised its forecast from 93 per cent to 88 per cent long period average (LPA), with the north-western region expected to be hit the most.
"Of course, today the forecast has been worsening," Rajan later said at an analyst con-call while reacting to the revised monsoons forecast.

He, however, tried to temper the scare, saying in the past as well the El Nino phenomenon had occurred but neither it impacted the farm output nor spiked inflation.
"There have been El Nino incidents in the past with reasonable rainfalls, and poor rainfall which has not led to a fall in production, and a fall in production which has not led to inflation. So, each path of this sequence is fraught with uncertainty," Rajan said.

He said government action is very important to mitigate the risk arising out of low monsoons.
"In the past, the government has acted. Last year, also there were government actions to mitigate consequences of a low rainfall," the Governor said.

Citing example of the period of 2000 to 2003 when there were weak monsoons, Rajan said the impact on inflation during those years was very limited, partly due to the government actions.
The RBI today reduced policy rates by 25 basis points, for the third time since January, to 7.25 per cent.
It also said inflation is expected to be pulled down by base-effect till August but to start rising thereafter to about 6 per cent by January 2016, slightly higher than the projections in April.
"We have accounted for an increase of food inflation in our forecast which is why our forecast have been raised to 6 per cent," Rajan said.

Besides the below-normal monsoons, firming up of crude prices and volatility in external environment are two other important risks to inflation and the economy, he said.