Monsoons likely to be Critical Factor for the Indian Monetary Policy

The  farm sector accounts for 14 percent of India's nearly $2 trillion economy, with two-thirds of its 1.2 billion population living in rural areas.  Half of India's farmland still lacks access to irrigation & depends on the vagaries of the monsoons.  

Poor rains generally hit summer crops such as rice, soybean, corn and cotton, raising food prices and pressuring economic growth that has nearly halved to below 5 percent in the past two years.  Rains are vital to rejuvenate  the  economy which is  battling its longest economic slowdown since the 1980s and to cool inflation that has averaged nearly 10-11 per cent for the past two years.

The Met Department has predicted  that the  rains will be 95 per cent normal this year and it is likely to revise its estimate later  in end June  according to the movement of the rainfall. If  official rain forecasts come true  then inflation  likely  to fall  below 8 per cent .

The likely fall in inflation, coupled with stability in the rupee and a slight pick up in growth    may lead RBI to be more balanced in its monetary policy making. The RBI has been repeatedly saying it will balance out concerns between the sagging growth and inflation even though it considers reining in the prices as a key objective. The RBI has raised its key rates three times  since  last September but took some growth-oriented measures like the decision to lower the SLR, which is likely to release an additional Rs 40,000 crore  ( $6.5B) for lending.