Will good monsoons enable RBI go slow on rate hikes this year?

To shield the somber economy from inflationary pressures and bolster economic growth, the Reserve Bank of India unanimously decided to turn hawkish and withdraw liquidity in a calibrated manner.
 
Given the boiling crude oil prices and supply-driven bottlenecks borne out of the Russia-Ukraine war, the RBI raised inflation projection by 100 bps to 6.7 per cent for the year, but retained growth outlook at 7.2 per cent for 2022-23.
 
Though the governor hinted at a faster economic recovery after India’s services PMI touched 11-year high in May on strong demand, an elevated inflation level could pinch consumer’s purchasing power.
While the FMCG sector will remain under pressure due to deepening inflation levels, analysts expect the interest rate-sensitive stocks, too, to remain subdued in an inflationary and a rising interest rate regime.
 
As investors digest 90 bps within two months, Kunal Valia of Waterfield Advisors anticipates volatility to persist across markets as banks sit on a rate-hiking spree.
 
Kunal Valia, Chief Investment Officer – Listed Investments, Waterfield Advisors, says EMIs set to rise. Borrowers to digest 90 bps rate hike in two months, he says adding that the economic slowdown in H2FY23 will be due to lower purchasing power. Market to remain volatile. 

However, the promise of a ‘better-than-expected’ normal monsoon forecasted by weather agencies IMD and Skymet, can bring rising global food prices under control.
The RBI, too, hopes that the normal monsoon prediction will help sustain rural demand and overall crop output, thereby giving them an elbow room to go slow on rate hikes.
 
As the south-west monsoon contributes nearly 70 per cent of the country’s annual rainfall would, it remains critical for the agricultural sector. Analysts believe that a healthy summer crop production would boost farm income and increase demand for farm-related equipment.
 
Ajit Mishra, VP - Research, Religare Broking says normal monsoon to be positive for rural demand. Sectors to benefit from normal monsoon: FMCG, tractors, fertilisers, he says. However, rising raw material prices in FMCG continues to be a worry.

As regards today, investors’ will watch out ECB’s policy stance and US unemployment data.