Monsoon related risks to dominate RBI's concerns around Indian inflation

July-August remain the key months for monsoons, and next four weeks account for ~30% of total seasonal rainfall. The Indian Meteorological Department (IMD) forecasts rainfall to be below normal in July and has maintained its seasonal forecast that rains are likely to be 88% of the long-period average. 

Overall sowing activity for food remains robust and was up ~61% relative to 2014 as of 10 July, with strong increases seen in pulses (~43.6%) and oilseeds (~355%). The government has also made inflation management a top priority, and we are starting to see the upward momentum in food inflation starting to slow down.

"Despite the upside surprise in June inflation print, FY 15-16 average CPI inflation is forecasted to be 5% (H1 FY 15-16: 4.5%, H2 FY 15-16: 5.5%). Monetary policy in the coming months is expected to remain data dependent", says Barclays. 

In its recent statement, the Reserve Bank of India (RBI) noted that monsoon-related risks dominate its concerns around inflation, although the governor recently noted that the progress of the monsoon this year has been good. In that context, the significant improvement in crop sowing activity, along with subdued increase in MSPs in mid-June for the summer crops, is a welcome sign. 

"Despite the RBI's recent cautious guidance, the risk of another cut in H2 FY 15 remains. However, a potential cut will remain contingent on greater clarity on a number of factors, including trends in commodity prices, the monsoon outcome, the likely 2016 inflation trajectory and the impact of a potential Fed rate hike, possibly in H2 15", added Barclays.