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.

India's Factory output falls to the lowest level in over 2 years

India’s industrial production dropped an annual 1.9% in February as manufacturing contracted 3.7%, the sharpest drop in 28 months, while exports tumbled 3.2% in March, recording its second straight month of contraction. 

Rating agency Fitch affirmed India’s sovereign rating at “BBB-” with a stable outlook and it  expects the country’s economic growth to accelerate from 4.7% in FY14 to 5.5% this fiscal and 6% next year. Earlier this week, the International Monetary Fund had forecast India’s GDP growth to accelerate from 4.6% in FY14 to 5.4% in FY15 and further to 6.4% in FY16. 

In Q3 of FY14, the trade deficit stood at $28.6 billion against $29.9 billion. The reduction in trade deficit in Q3 suggests further improvement in the (current account deficit)  for  Q4.  If services exports, remittances and investment income remain broadly unchanged in Q4, CAD for fiscal 2014 could fall below 2% of GDP — for the first time since fiscal 2008-09. Exports for all of FY14 stood at $312 billion against the targeted $325 billion but higher than $300 billion in FY13, a growth of 4%. 

Importantly, given the prolonged slump in domestic demand, exports of goods and services as a share of GDP was projected to rise from 22% in FY11 and 24% in FY13 to 24.9% in FY14, as per advance GDP estimate released a few weeks ago. Imports, however, were projected to account for 28.8% of GDP in FY14, down from 30.7% in the previous year. 

As for industrial output, electricity generation grew at its fastest since September last year at 11.5% in February and mining posted a 1.4% expansion. These were, however, not enough to offset a 3.7% contraction in manufacturing, stoked by a demand collapse as the industrial production slumped from 0.8% growth in January. In six of the 11 months to February, industrial production witnessed contraction.