Rough weather ahead: El Nino may impact GDP, stoke inflation

Press Trust of India Posted online: Monday, Apr 28, 2014 at 0000 hrs
New Delhi : An El Nino-induced below-normal monsoon this year could have a bearing on economic growth in FY 2015 and inflation, according to reports.

An HSBC report said inflation may remain sticky in the current financial year as a possible El Nino effect on the monsoon is likely to push up food prices and geopolitical uncertainties are likely to pump up global commodity rates.

A Bank of America Merrill Lynch (BofA-ML) report said an El Nino-induced drought poses a 50-75 basis points risk to India's FY 2015 growth forecast of 5.4% and could result in a spike in inflation levels to around 8-10%.

BofA-ML said if rains are normal, CPI inflation should come off to 7-7.5% by March 2015 and if the El Nino impacts the kharif harvest, rising food prices would push up CPI inflation to 8-10%.

The RBI may eventually respond by tightening policy rates further to contain upside risks to prices and to bring inflation to 6% or below by early 2016 if it sticks to the Patel Committee's recommended glide path, HSBC said.

The RBI's target is to ease retail inflation, as measured by the Consumer Price Index, to 8% by January 2015 and 6% by January 2016.

Both retail and wholesale price inflation accelerated in March due to rising food prices. While wholesale inflation rose to a three-month high of 5.7%, retail inflation inched up to 8.31%, after softening for three straight months since December. The RBI had increased the key policy repo rate three times since Raghuram Rajan took over as Governor in September to contain inflation. India is expected to see below normal monsoon this year with Met department forecasting 95% rainfall after a good spell of four years.

India Meteorological Department (IMD) officials said the monsoon is expected to be below normal because of the El-Nino effect, which is generally associated with the warming of ocean water.

El Nino refers to the warmer-than-average sea surface temperature in the central and eastern tropical Pacific Ocean.This condition occurs every 4-12 years and had last impacted India's monsoon in 2009, leading to the worst drought in almost four decades.