Near-normal monsoon on the cards. The IMD forecasts the June-September monsoon at 96% of LPA, which qualifies as 'normal' southwest monsoons. The IMD noted that weak El Niño conditions could likely develop in the latter half of the season. We believe it is premature to conclude on effects on growth and prices. But after a normal monsoon in FY2017, the rural sector will have cushion to weather in case of some weather-related shocks. We maintain our call for a pause from the RBI, which will be on wait-and-watch mode until some clarity emerges on the monsoon outturn.
Probability of precipitation skewed towards below-normal to normal monsoon
The Indian Meteorological Department (IMD) forecasts the southwest monsoon at 96% of Long Period Average (LPA) with a model error of (+/-)5%. The LPA for 1951-2000 is 89 cms. The first estimate for southwest monsoon in FY2017 was at 106% of LPA. By end of the season (June-September) monsoon was ~3% below normal. The IMD sees 38% probability of near-normal monsoon in FY2018. Spatial and temporal distribution of monsoons will be available in the second update in June. Skymet, an independent agency, has forecast monsoon at 95% of LPA with 10% probability of above-normal rainfall, 50% of normal rainfall, 0% of excess rainfall, 25% of below-normal rainfall, and 15% of drought.
Probability of weak El Niño conditions in latter half of the season
The IMD notes that weak El Nino conditions could develop in the latter part of the monsoon season. The Southern Oscillation Index (SOI) has been in the neutral zone since mid-October. However, the Australian Meteorological Bureau sees a 50% chance of El Niño conditions developing in 2HCY17. The latest 30-day SOI value is 3.8 while the monthly value for March was 5.1 (Exhibit 2). Typically, sustained SOI values below/above (-)7/(+7) are indicative of El Niño/La Niña conditions. However, weak positive Indian Ocean Dipole (IOD) could develop during middle of the season and sustain, which could be positive for rainfall.
Premature to conclude on growth or price implications
Drawing implications from monsoon estimates for growth or prices will be premature at this juncture. The translation of strong/weak monsoon into production gain/loss and income gain/loss feeding into rise/fall in aggregate demand is too early to be factored in right now. Similarly, price pressures would depend on the government's response in case of a weak monsoon. Price pressures over the past few years has been muted despite a weak monsoon and lower output due to the government's price-management policies. However, forecast of below-normal monsoon portends markets to exercise some caution regarding growth and inflation.
Monsoon forecast supports RBI's stance
The monsoon forecast of a near-normal monsoon would keep alive any concerns of inflationary pressures. However, the government has been proactive in managing food price pressures over the past 2-3 years, which insulated food prices from weather's vagaries. The RBI has shifted its stance to neutral and has outlined monsoon outturn as one of the key upside risks to inflation. The spatial and temporal distribution of the monsoon needs to be watched for gauging the impact on food prices. We maintain our call of RBI remaining on an extended pause and definitely wait-and-watch through the monsoon season.