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The disruptive weather phenomenon El Nino could shave as much as 75 basis points off the country’s economic output as a hit on agriculture could cause the central bank to delay cutting interest rates.
Inflationary pressures could cause the Reserve Bank of India to keep interest rates high, affecting economic growth, according to a Bank of America Merrill Lynch report entitled ‘El Nino: Met sees sub-normal rains.’
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“We estimate that poor rains will hurt by 50-75bp. With a normal monsoon, CPI inflation will likely soften to 7% levels by March 2015 opening the possibility of RBI rate cuts by December. An El Nino will stick it up at 8-10% pushing RBI rate cuts to 2015,” said the report authored by India Economists Indranil Sen Gupta and Abhishek Gupta and dated April 25.
However growth could rise from 4.7% to 5.4% if the rains are normal, the report added though a clearer picture is only likely closer to July. The India Met has forecast a below normal monsoon with a 60% chance of El Nino.
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“There are typically three impacts. First, drought directly impacts the autumn kharif harvest (8% of GDP). A 3% swing, for example, would pull down growth by about 25bp. Second, there are second round effects of the slowdown in agriculture that could be as large as the first. Finally, industrial recovery will be pushed back further if the RBI delays rate cuts due to rising agflation and inflation,” it added.
