India Cuts Monsoon Forecast as Rajan Links Rates to Rainfall

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The monsoon rainfall in India will be deficient for a second straight year as the emergence of an El Nino event threatens weather worldwide, potentially hurting agriculture output and accelerating food inflation.

The rainfall may be 88 percent of a 50-year average of 89 centimeters (35 inches) between June and September, less than the 93 percent predicted in April, Earth Sciences Minister Harsh Vardhan told reporters in New Delhi on Tuesday. The forecast came less than two hours after central bank Governor Raghuram Rajan cut interest rates and said further action will hinge on the monsoon rains.

Below-normal showers may fan prices of everything from rice to lentils and vegetables in Asia’s third-largest economy, where food costs account for almost 50 percent of the consumer price index. Rajan flagged deficient precipitation as the biggest risk to the economy as agriculture accounts for about 15 percent of India’s gross domestic product.

“The forecast is a cause of concern for the economy as inflation may again go up and a lower interest rate regime, which the industry has been expecting, may not be possible,” Harish Galipelli, head of commodities and currencies at Inditrade Derivatives & Commodities Ltd., said by phone from Hyderabad. “There will be an upside in prices of pulses, oilseeds and vegetables.”

Inflation Target

Rajan has cut interest rates three times this year as consumer prices held below his 6 percent target for an eighth straight month. Prices are likely to fall until August and then start rising to about 6 percent by January 2016, higher than projections made in April, Rajan said on Tuesday.

A normal monsoon rainfall is critical to Prime Minister Narendra Modi’s plan to accelerate economic growth in a country where smartphone makers to gold jewelry retailers derive the bulk of their sales from 833 million people living in villages who depend on farming. The monsoon rainfall waters more than half of India’s farmland.

The monsoon forecast has a margin of error of plus or minus 4 percent, Vardhan said. Multiple factors including emergence of the El Nino weather conditions are seen lowering rainfall, he said. The rains have yet to arrive over India’s southern region, missing the normal onset date of June 1.

El Nino Threat

Australia declared an El Nino last month, joining weather agencies from the U.S. and Japan. Forecasters worldwide are seeking to map the probable impact of the pattern that can bake Asia, bring wetter weather to South America and crimp the frequency of Atlantic hurricanes.

Rain in July, the wettest month of the monsoon season, is seen at 92 percent of the average between 1951 and 2000, while August may record only 90 percent, the India Meteorological Department said in a statement. The prediction has a margin of error of plus or minus 9 percent, the agency said.

Northwest India, which includes cotton, rice and sugar cane growing states of Punjab, Haryana, Rajasthan and Uttar Pradesh, is forecast to get 85 percent of the average rainfall, the bureau said. While showers will be 90 percent of the average in central India, the main cotton and soybean regions, southern states of Karnataka, Kerala and Andhra Pradesh, the main producers of coffee, rice and rubber, may get 92 percent average precipitation, the bureau said.

Containing Prices

India, which gets more than 70 percent of its annual rainfall during the monsoon season, will be able to contain price increases with better management of its food economy and the slump in global commodity prices, Motilal Oswal, chairman of Motilal Oswal Financial Services Ltd., said in an e-mailed statement on Tuesday.

Modi has taken short-term steps to control food prices during his first year in office. These include selling some of the nation’s wheat stocks on the open market, pushing states to let farmers sell fruits and vegetables directly to consumers, and capping growth of guaranteed prices for cereal crops.

“We expect food inflation by and large to remain better anchored unless the monsoon shortage turns out to be worse than current forecasts,” Siddhartha Sanyal and Rahul Bajoria, economists at Barclays Plc, said in a report e-mailed on Tuesday. “The government assures that it will remain active in managing food-stocks, if needed, to contain food inflation.”

There is no direct correlation between monsoon and El Ninos, according to data from the India Meteorological Department. Of the eight El Nino years since 1991, India recorded monsoon failures and drought situations only on two occasions, according to CRISIL Ltd.

The crops at most risk from a monsoon failure will be rice, cotton, soybeans and lentils. India’s food grain output including rice and wheat fell 5.3 percent to 251.1 million tons in 2014-15, when monsoon rainfall was 12 percent below average, according to the Farm Ministry.

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