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Monsoon revives, would it soften inflation and interest rates? - Outside View by PersonalFN

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Monsoon revives, would it soften inflation and interest rates?
Aug 4, 2014

Markets are dynamic and often driven by investor sentiments. And this time we are about to witness a change in sentiments of debt market investors.

By the end of June 2014, it was being predicted that, this may be a draught year. Comes end of July, there has been a 360 degree change in the prediction. While Indian Meteorological Department (IMD) was optimistic about the recovery of rain, some private forecasters claimed that there was a 60% possibility of a draught this year. Considering strong hold of monsoon during last 2 weeks of July, it appears that those were over-estimations of a draught indeed.

So far, out of 36 subdivisions, 15 have received normal rains and 21 have received deficient rain. Having said this, rain deficit is reducing fast. In June 2014, rain deficit was as high as 43%. However, rain gathered strength thereafter. According to nationwide figures released by the Met department, the monsoon was 90.3% of normal in July. The overall rain deficit (June 1 to July 31) now stands at 22%. That's a vast improvement over previous month. Further, IMD has predicted that rain would be 96% of long term averages in August. August may yet prove to be better for the deficit states.

What's more?

Earlier it was believed that there were 80% chances that 2014 would be an El Nino year. All bearish estimates about Indian monsoon were largely drawn from high possibility of occurrence of El Nino. But there is good news. Bureau of Meterology, Australia recently predicted that possibility of development of El Nino pattern has reduced to 50%. IMD has also backed this view. The latest figures coincided with the fading away of the El Nino threat.

El Nino and Monsoon...

El Nino pattern brings about climatic changes which result in temporary warming of sea surface temperatures in Pacific Ocean. It is observed that, during El Nino year India gets below normal monsoon rainfall. It is now argued that rather than intensity of El Nino its location may have greater impact on monsoon. As per National Oceanic and Atmospheric Administration of the U.S., it is not necessary that strong El Nino means poor monsoon. Although it is true that 5 most dreaded draughts in India since 1950 have occurred during El Nino years, El Nino has not always been bad. The research paper on the national El Nino monitor of U.S. says that, location of warming of pacific water is what really matters for monsoon. Year 1997 was one of the most intense El-Nino years of 20th century, but no dire effects were seen on monsoon.

Economic updates

Rainfall in western, central and northern regions has revived sharply over last two weeks. Strong revival of monsoon has speeded up the sowing activity. As per data from the Department of Agriculture, sowing of Kharif crops covered about 53.31 million hectares which is about 25% lower than past 5 years' average during the same period. Delayed start of monsoon is one of the primary reasons for comparatively lower sowing. As per the latest estimates, water level in 84 major reservoirs has shown remarkable improvement. If monsoon continues to be strong in August, Rabi crops may not have much of an impact.

PersonalFN is of the view that, revival of monsoon bodes well for Indian economy. Still most of Indian farms are rain-fed and thus monsoon plays a major role in deciding the level of food price inflation. RBI has kept interest rates high due to high retail inflation. It would be too early to predict any fall in inflation expectation. RBI may or may not reduce policy rates immediately. But revival of monsoon and upbeat outlook on its further progress may give some respite. The cooling of vegetable rates might eventually have a positive impact on inflation. Softening inflation might give RBI some headroom to reduce interest rates. It might bring some cheers for bond market investors.

To sum up

The U-turn in in the prediction about monsoon reasserts the view of PersonalFN - Speculation over any event is bad for your investments. PersonalFN has always believed that, asset allocation matters the most as far as success in investing is concerned. You shouldn't base your investments in debt mutual funds predicting what RBI may do at the policy review meeting. RBI makes policy decisions after considering a number of factors. It is quite possible that you may overlook any of the critical factors. Thus consider your risk appetite and time horizon before investing in debt funds. PersonalFN is of the view that, while you may spread your investments across maturities, you shouldn't invest more than 20% of debt component of your portfolio in longer maturity funds.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund Research Firm known for offering unbiased and honest opinion on investing.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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Aug 4, 2014

With the El Nino cooling off in the Pacific hopes of a good monsoon are on the rise in India.This is expected to improve the agricultural sector and thereby the economy.

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