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The southwest monsoons arrived India on 5 June and have been mixed so far. Cumulatively, rainfall conditions have been normal, with the total rainfall between 1 June and 11 June just 1% below normal. However, the spatial distribution remains rather extreme with only 18 out of 36 regions showing excess or normal rainfall conditions, out of which eight regions are reporting excessive rainfall and 10 are showing scarce conditions. We think clearer trends will likely materialise during Q3.
The Indian Meteorological Department (IMD) downgraded its assessment of the monsoons in early June, and now forecasts only 88% of long period average rainfall in 2015, compared with a projection of 93% earlier, notes Barclays. This concern of poor monsoon rainfall (the second in a row) is leading to greater preparations by the government, which has announced that it will prepare contingency plans for 600 out of 676 districts, and also announced its intention to import certain food items (eg., pulses, edible oils) in order to contain prices.
The Reserve Bank of India (RBI) in its recent statement noted that monsoon-related risks dominate its concerns around inflation.
"Trends in food prices will likely have considerable influence on monetary policy in the coming months, and the CPI inflation print for May (coming out later today) will be useful to gauge generalised food price pressures. May CPI inflation is expected at 4.9% y/y, flat from April. Food inflation has softened to around 6% y/y, despite sub-optimal weather conditions during the past year, from an average of over 11% pa during the previous five years", estimates Barclays.
Among other things, the government's more active management of food stocks, allowing only a modest increase in minimum support prices (MSPs) of agro commodities, and stronger vigilance have played a major role in containing food inflation and inflation expectations. Thus food inflation by and large likely to remain better anchored unless the monsoon shortage turns out to be worse than current forecasts, adds Barclays.
