Bank of America Merrill Lynch (BofA-ML) today warned of a rising risk of El Nino and said in case it kicks in, the Reserve Bank of India (RBI) will be unable to achieve its glided path for CPI.
The RBI deputy governor Urjit Patel-led committee has set CPI target at 8 per cent by January 2015.
"If the rains are normal, CPI inflation will likely stay below the RBI's 8 per cent-in-a-year-ahead target. In case of an El Nino, this will be very difficult to achieve, as a 5 per cent swing in food prices impacts CPI inflation 250 basis points," BofAML said in a report here.
El Nino, which occurs at irregular intervals of 2-7 years, weakens the Asian monsoon, often causing drought in north-west and central India.
The report said the Australian weather bureau sees increasing chance of El Nino in coming months. The US Climate Prediction Centre also sees about a 50 per cent chance of El Nino developing during the summer or fall.
International climate models surveyed by the Australian weather bureau indicate that warming of the tropical Pacific is likely in the coming months, with most models showing temperatures approaching or exceeding El Nino thresholds during the austral winter, the report said.
BofAML said CPI inflation will likely climb back to 8.4 per cent in March with vegetable prices going up again in the wake of hailstorms.
CPI inflation eased to 8.1 per cent in February from 8.8 per cent in January and 9.9 per cent in December.
The report expects that RBI may not raise policy rates on April 1 review.