Weak monsoon, slowdown concerns may prompt RBI to lower rates


Despite heavy rains across the country for over a week, rains are 14 per cent below normal. This could lead to a slowdown in farm output and overall growth in the economy, prompting the central bank to lower policy rates by 25 bps in its policy meeting on August 08, according to Bank of America Merrill Lynch. In a separate note, even Deutsche Bank has forecast a 25 bps rate cut on slowdown concerns.

The Reserve Bank of India is expected to continue with its accommodative policy. “We continue to expect Reserve bank of India’s monetary policy committee to cut 25bps on August 7, pause with inflation going up temporarily on base effects/drought and cut 25bps in February again as inflation abates” say economists Indranil Sengupta and Ashta Gudwani in a report.

“We are forecasting a 25 basis points rate cut in the upcoming monetary policy in August, but we do not rule out the possibility of a 35 basis points reduction, given the downside risks to growth” said, Kaushik Das, chief India economist at Deutsche Bank.


Rains are expected to be sub-optimal impact the crop outlook. “We face the spectre of a severe drought in India” they said. Rains are 14% below normal, way below the Met’s 96% forecast. Rains are 14% below normal, way below the Met’s 96% forecast. This has lead to a 6.4% drop in the autumn kharif sowing, with rivers running 25% below 2018 levels. “This, in turn, poses a 50-75bp risk to our 7% FY20 growth forecast as the autumn kharif forecast directly accounts for 3-4% of GDP. Rural demand, in particular, will be impacted” say the Bank of Amercia Merrill Lynch economists.

Besides, this is expected to pressure up agflation in the second half of 2019. 5% swing in agro prices impacts CPI inflation by 250bp, they say.

“A poor monsoon could also lead to increased problems in the farm sector, necessitating further fiscal support for farmers, which could then put upward pressure on fiscal deficit targets” said Das.

The last time monsoons dipped to this extent was in 2002 when it was 81% of normal. The only saving grace is that the Met expects the rains to continue to revive next week. Autumn kharif sowing has dropped by 6.4% in the autumn kharif sowing. Rivers are running 25% below 2018 levels. Of the two sowing months of July and August, the first is almost over. “A solace is that the reservoirs watering the winter wheat crop are still stocked up” they say.

Poor rains pose a 50-75bps risk to their 7% FY’20 growth forecast given that the autumn kharif forecast directly accounts for 3-4% of GDP. Rural demand, in particular, will be impacted. Experience suggests that the kharif farmer who is impacted by a drought will return to spend only after he/she sees a good harvest. As it is, FY’21 growth can slip to 5.7% from Bank of America Merill Lynch’s 7.2% base case if the US-China trade war drags global growth down.

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