The impact on rural demand and growth could be ‘substantial’ if rains are below normal, global brokerage firm HSBC said, adding that the Reserve Bank (RBI) will be mindful and is likely to cut the repo rate by 25 basis points in the June meeting.
According to the global financial services major, a weak monsoon endangers both growth recovery and steady disinflation. But of the two, rural growth could hurt more. “Food prices seem to be benefiting from better supply management, low global prices, and a gradually rising production of perishable items,” HSBC Chief India Economist Pranjul Bhandari said in a research note, adding that "in light of the differentiated impact of rains, we expect a final 25-basis point rate cut from RBI in June’.
In the policy review in April, RBI kept the key policy rate unchanged on fears of unseasonal rain impacting food prices. The central bank has cut rate by 0.5 per cent since January. The next review is due in the first week of June. The report highlighted that some precautionary fiscal spending may be needed to control the situation, but as long as it is not a severe drought, this should be manageable under current fiscal targets.
In the case of below-normal rains, HSBC noted, prices of perishable items could spike in the near term, but the overall increase may be more constrained than earlier periods of poor rains. The country is likely to witness a ‘below normal’ monsoon this season, for the second consecutive year, the IMD predicted on Wednesday as it partly blamed the El Nino phenomenon for the low forecast.