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Monsoons enter crucial phase

Rains: 2009 or 2012?

Every year, India looks up to the rain gods to be blessed with bountiful rain. This is not surprising as 56% of the area
under cultivation in the country does not have an irrigation buffer. Even when the economy, particularly the nonagriculture sector, is doing well rains are important as they provide an additional kick to rural incomes and help keep a
tab on food inflation. And in today's depressed growth environment, the economy can ill-afford a hit from a poor
monsoon.

The year began with a threat of El Nino - a condition that weakens the Asian monsoon, often causing drought in northwest and central India and heavy rainfall (or even floods) in the north-eastern part. In June, the first month of the
monsoon season, rainfall was close to 43% below the long period average. This was the weakest start to the monsoon in
113 years and delayed the sowing of crops.

But rainfall deficiency in June is hardly a cause of worry as a pick-up in rains in July and August can make up for the
weak start. A similar situation had emerged in both 2009 and 2012. Eventually, however, 2009 turned out to be a drought
year whereas rains recovered sharply in the latter half of July in 2012. This year too, the weather gods obliged in July
and the first few days of August. Consequently, the rainfall deficit reduced to 18% by August 10. Complementing this is
the good news that the threat of an El Nino has receded somewhat.

We expect the rainfall pattern in 2014 to be similar to that in 2012 when rains recovered significantly in July and August.
The IMD (Indian Meteorological Department) expects overall rainfall deficiency of around 10%, which implies that rains
will pick up further in the remaining part of the season. CRISIL's Deficient Rainfall Impact Parameter (DRIP) shows that
Maharashtra, Gujarat and Rajasthan are the worst-hit. These states have a large share of the production of coarse
cereals (jowar, bajra), pulses (tur) and oilseeds (groundnut, soybean). Overall sowing too has been delayed for these
crops. These states/crops will pull down the agricultural GDP growth to 1% in 2014-15.

This is unlikely to derail the Reserve Bank of India's (RBI) consumer price index (CPI) inflation target of 8% by January
2015. The most-affected crops have a low weight (4.3%) in the CPI. Moreover, government measures (such a lower rise
in minimum support price or MSP this year and ample buffer stocks) and a favourable base-effect will keep the lid on
foodgrain inflation. The risk is from elevated fruit and vegetable prices, which are hard to predict and can play spoilsport.
Fruit and vegetable prices can spike even in a good monsoon year as was seen in 2013 and the risk is always high when
the monsoons fail.

We do not expect RBI to cut interest rates this year. The RBI's emphasis on bringing down inflation to 6% by 2016
reduces the chances of a rate cut as this target would be hard to achieve, in our opinion. Achieving 6% inflation will be
possible only if there is a significant and sustainable drop in food inflation. In addition, once growth revives, disinflation
tendencies in non-food items could reverse and make RBI's target even more challenging.