An early monsoon will provide some headroom to the Reserve Bank of India (RBI) in monetary easing, according to experts. “The initial signals of monsoon seem to be very encouraging in terms of timeliness and the progress.
Assuming that similar trends continue going forward, it is positive for the agriculture output and we are seeing over the next few months CPI (consumer price index) easing, which will be led by easing food prices,” said Shubhada Rao, chief economist, YES Bank.
It is forecast that this year will witness normal monsoon and according to economists, this will help bring down prices of agricultural commodities, key components in CPI inflation.
This had slowed to 9.39 per cent in April, compared with 10.39 per cent in March. Consumer inflation for May will be released this week.
RBI is to announce its mid-quarter review of monetary policy on June 17. 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 75 basis points this year. At present, the repo rate is at 7.25 per cent.
“For RBI, this year’s monsoons again will 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 will likely lead to a softer increase in minimum support prices of various agro-commodities in FY14, which is their baseline expectation. “In sum, in case of favourable monsoon rainfall, the CPI inflation could move lower to an average of seven to eight per cent in FY14, which would be a five-year low,” said Bajoria and Sanyal.
Meanwhile, government bond yields are expected to fall further from the current levels due to softening of inflation data.
The yield on the 10-year benchmark government bond 7.16 per cent 2023 ended at 7.30 per cent on Tuesday, compared to the previous close of 7.28 per cent.
“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.
