Opinion | Move aside MPC, the rain gods will decide the next rate hike

Drought.

The vagaries of the weather might upset India’s growth-inflation dynamics yet again. A day after Reserve Bank of India’s (RBI's) Monetary Policy Committee (MPC) said that the overall performance of the monsoon so far augured well for food inflation in the medium term, one of the two meteorological agencies in the country raised a red flag.

Skymet Weather Services has pared its estimate for monsoon this year to 92 percent of the long-term average compared to a prediction of 100 percent made in April. August rains are seen at 88 percent of the long-term average compared to the earlier forecast of 96 percent. For September, the expectation is that the monsoon will be 93 percent normal, lower than the earlier prediction of 101 percent.

With current data, Skymet has put the chance of below-normal monsoon showers at 60 percent. Separately, the Press Trust of India reported that the Indian Meteorological Department (IMD) might downgrade its forecast for August and September, which could lower the prediction for the entire season.

The importance of the south-west monsoons can’t be overstated. It accounts for more than 70 percent of India’s annual showers and irrigates more than half the country’s farmland. The livelihood of at least 700 million Indians is dependent on it. The monsoon also fills up 81 reservoirs needed for hydel power generation and irrigation.

Thus, if the weatherman’s predictions turn out to be true, then RBI’s assumptions go for a toss and food inflation might rear its head again.

Already, trends in sowing suggest chances of a lower output. Reports say that sowing of key kharif crops such as rice, pulses, oilseeds and cotton, among others, is down 7.5 percent at 737.96 lakh hectares. Soya bean, moong and sugarcane are about the only crops that have seen an increasing in area under cultivation.

A significant part of the decline can be attributed to lower paddy planting. Uttar Pradesh, Bihar, West Bengal and Jharkhand account for most of the shortfall. Bihar is the most severely affected with only five of its 38 districts receiving normal rainfall and six districts witnessing a deficit of as high as 60 percent.

The fact that higher minimum support price (MSP) for many crops has not resulted in higher sowing for these crops (Bajra, Ragi, Groundnut, Sunflower, among others) point to the possibility of lower output this year.

If this scenario materialises it will bust the MPC’s assumptions. Remember that the MPC’s statement said, "The progress of the monsoon so far and a sharper than the usual increase in MSPs of Kharif crops are expected to boost rural demand by raising farmers’ income."

Lower food production would not only result in higher food inflation, but will impact growth. But more importantly, rural India will have lesser money in its hand, which in an election year would mean populist government schemes and higher fiscal deficit. That could pressure the MPC to raise rates again, their hands forced by the rain gods.