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The onset of early monsoon is set to provide comfort to the Reserve Bank of India (RBI) in further monetary easing. It is forecasted that 2013 will witness normal monsoon and according to economists this will help to bring down prices of agricultural commodities which are key components in Consumer Price Index (CPI) inflation.
“The initial signals of monsoon seems to be very encouraging in terms of timeliness and the progress. Assuming that similar trends continue going forward, it is positive for agriculture output and we are seeing over the next few months CPI easing which will be led by easing food prices,” said Shubhada Rao, chief economist, YES Bank. The central bank will announce its its mid quarter review of monetary policy on 17 June.
CPI inflation slowed to 9.39% in April compared with 10.39% in March. CPI inflation for May will be released this week.
However, many economists believe that RBI may maintain status quo on key policy rates in the mid-quarter review. Further rate cuts may get deferred to July as by then the central bank will have complete comfort on the progress of monsoon. RBI has reduced the repo rate by 25 bps in 2013 by 75 bps. At present, the repo rate is at 7.25%.
“For RBI, this year's monsoons again will be be a crucial variable in calibrating monetary policy, as they will have implications for both inflation and growth. Although the central bank's guidance remains cautious, we believe the flow of macroeconomic data – continued downside surprises in inflation, a more benign current account and weak growth indicators – has created room for larger monetary easing in the coming months,” said Rahul Bajoria and Siddhartha Sanyal of Barclays Capital.
According to Bajoria and Sanyal a normal monsoon would likely lead to a softer increase in minimum support prices of various agro-commodities in fiscal year 2013-14, which is their baseline expectation. “In sum, in case of favourable monsoon rainfall, the CPI inflation could move lower, to an average of 7-8% in fiscal 2013-14, which would be a five-year low,” said Bajoria and Sanyal.
Meanwhile, government bond yields are expected to fall further from current levels due to softening inflation data. The yield on the 10-year benchmark government bond 7.16% 2023 ended at 7.30% on Tuesday compared with previous close of 7.28%. “Since inflation will be softer, the yields may fall further. But the fall will not be drastic because of foreign institutional investors withdrawing from domestic debt,” said Ajay Manglunia, senior vice-president, Edelweiss Securities.
