Monsoon still plays an important role in determining the policy rate outlook in India. Base case is for a moderate rainfall deficiency, forecasting CPI inflation for Jan-2016 and Mar-2016 at 5.8% and 5.7% respectively. The RBI is likely to stay on hold and only cut rates again next fiscal year (see India: Improving growth inflation mix). However, our analysis shows that a ‘normal’ monsoon could shave inflation projections by 40-50 bp, potentially allowing the RBI to shift the timing of a rate cut to 4Q of the current financial year. A very poor monsoon, on the other hand, can add 170 bp to headline CPI. But the impact could be lower if the government steps in with adequate measures to boost availability of certain food items.
Click here to read the Credit Suisse report
Here is what Credit Suisse report takes a look at:
● We examine linkages between El Niño patterns, rainfall in India, agricultural production and CPI inflation. The probability of a sub-par monsoon is 85% in an El Niño year, and there is a strong correlation between agricultural production and rainfall since 2001.
● Food Inflation seems to have become more persistent. But limited evidence of second-round effects from headline to core inflation, together with government measures, could limit the impact if rainfall deficiency is severe.
● Our base case is for a moderate rainfall deficiency, forecasting CPI inflation for Jan-2016 and Mar-2016 at 5.8% and 5.7% respectively. The RBI is likely to stay on hold and only cut rates again next fiscal year.
● However, our analysis shows that a ‘normal’ monsoon could shave inflation projections by 40-50 bp, potentially allowing the RBI to shift the timing of a rate cut to 4Q of the current financial year.
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