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The 'El Nino' risk is expected to keep inflation elevated and RBI on a "long hold" as the first rate cut by the central bank is likely in early 2015 rather than this December, says a report.
El Nino, which refers to warmer-than-average sea surface temperatures in the central and eastern tropical Pacific Ocean, will likely to keep CPI inflation up at 8-10% in the second half of 2014 and will pose a 50-70 basis point risk to this fiscal's growth expectation, the report by financial services major Bank of America Merrill Lynch said.
El Nino occurs every four to 12 years and had last hit India's monsoon in 2009, leading to the worst drought in almost four decades.
"If rains are normal, CPI inflation should drop to 7-7.5% by March 2015. If the El Nino impacts the kharif harvest, rising food prices could push up CPI inflation to 8 -10%, essentially irrespective of monetary policy action," the report said.
The Indian Meteorological department early this week cut its June-September monsoon forecast to 93% of the long-run average from an already below-normal 95% projected earlier.
The chance of an El Nino during the monsoon has also been hiked to more than 70%, from 60%.
"We continue to expect the RBI to remain on long hold. An El Nino will likely push the first rate cut to early 2015 from December," the report said.
However, the report said the picture is likely to be clear only around July. A 5% change in food prices impacts CPI inflation by 250 basis points.
The report estimates that an El Nino poses a 50-75 basis points risk to its 5.4% FY14 growth forecast.
The Reserve Bank on June 3, left key rates unchanged and unlocked about Rs 40,000 crore of Funds by reducing the amount of deposits banks are required to park in government securities.
This was the second time in a row that interest rates have been left unchanged amid demands for moderation to spur growth.
