How El Nino may affect Rajan's plan to cut rates

The RBI is slated to announce its bi-monthly monetary policy on June 2.

Foreign brokerage HSBC on Wednesday said the Reserve Bank of India will go for a 25 bps cut in repo rates in June 2 policy review but the El Nino impact may curtail the prospect of further cuts in the coming months.

"If the monsoon is worse than feared, this will severely constrain the RBI's ability to ease policy over the medium-term, seeing that its CPI targets would be at risk," it said.

The note came days after the US, Australian and Japanese Met agencies warned of a full El Nino effect developing around the Pacific rim.

The Indian Met Department has also predicted a below normal monsoon, at 93 per cent of the long period average.

The RBI is slated to announce its bi-monthly monetary policy on June 2, wherein a majority of watchers expect a rate cut, with inflation coming below 5 per cent mark and factory output being sluggish.

However, the view is divided on the stance afterwards, with concerns on a spike in inflation. HSBC said inflation may spike in the second half of the year because of the El Nino factor, as food prices may go up.

Finance Minister Arun Jaitley also said that his ‘expectation’ from RBI Governor Raghuram Rajan was the same as general expectation on an interest rate cut.

The supply side issues and the climbing oil prices will add to the troubles, it said. However, the recent government measures like easing up import and export of food items shall help the country on the supply side front, it added.

If the rainfall dips below 50 per cent of the long period average, it may result in an increase in sugar, soybean, grain and cooking oil imports, which will put pressure on the current account deficit, it said, adding that such a scenario will also limit the RBI's easing because of the shock to inflation.

Image: A woman carries her child through a heavy rain shower in Chandigarh. Photograph: Ajay Verma/Reuters