Economy: Normal monsoon on the cards (IMD monsoon forecast) - Kotak

Normal monsoon on the cards. The IMD forecasts the June-September monsoon at 97% of LPA, which qualifies as 'normal' southwest monsoons though the probabilities are more skewed towards the weaker side. We believe it is premature to conclude on effects on growth and prices though this forecast should bode well for the rural sector. We maintain our call for an extended pause from the RBI, which will be on a wait-and-watch mode until there is significant adverse impact from the monsoons.

Probability of rainfall skewed towards normal to below-normal monsoon

The Indian Meteorological Department (IMD) forecasts the southwest monsoon at 97% 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 FY2018 was at 96% of LPA. By end of the season (June-September), monsoon was around 5% below normal. The IMD sees 42% probability of normal monsoon and 30% probability of below-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 100% of LPA with 5% probability of excess rainfall, 20% of above-normal rainfall, 55% of normal rainfall, 20% of below-normal rainfall, and 0% of drought.

Weak La Nina conditions to move towards neutral by start of monsoon

The IMD notes that weak La Nina conditions currently underway (usually positive for monsoon) will likely shift to neutral by the start of the monsoon season. The Southern Oscillation Index (SOI) has been in the weak La Nina zone since September 2017. The Australian Meteorological Bureau expects neutral conditions to sustain through most part of southern hemisphere autumn-winter (March-September). The latest 30-day SOI value is 12.4 while the monthly value for March was 10.5. Typically, sustained SOI values below/above (-)7/(+7) are indicative of El Nino/La Nina conditions. However, weak negative Indian Ocean Dipole (IOD) could develop during middle of the season and sustain, which could be negative 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. But consecutive good monsoons will be a positive for the farm sector from a volume perspective with some bearing on the overall rural demand if prices do not move too low.

RBI likely to be on an extended pause

The IMD's forecast of a normal to below-normal monsoon would allay some concerns of any sharp food price increases. The government has also been proactive in managing food price pressures over the past 2-3 years, which insulated food prices from weather's vagaries. However, the RBI would want to see how the MSP policy pans out and the final contours for the same. The spatial and temporal distribution of the monsoon needs to be watched for gauging the impact on food prices. We maintain our call that the RBI will likely remain on an extended pause and watch for the evolution of inflationary pressures.

Source : Equity Bulls

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