Monsoon-related risks to dominate concerns around India's inflation

The Reserve Bank of India (RBI) noted that monsoon-related risks dominate its concerns around inflation, although the governor recently noted that the progress of the monsoon this year has been good.

Next four weeks account for ~30% of total seasonal rainfall and July-August remain the key months for monsoons. The Indian Meteorological Department (IMD) has forecast rainfall to be below normal in July and maintains that seasonal forecast is likely to be at 88% of the long-period average. 

Skymet, another private agency is forecasting rainfall to be normal in July. Sowing activity continues to pick up and was up ~57% relative to 2014 as of 3 July, with strong increases seen in pulses (~132%) and oilseeds (403%). The government has also made inflation management a top priority by placing import orders for wheat, pulses and oilseeds.

Although India's headline inflation remains manageable, risks around food inflation persist. In that context, the lack of an increase in MSPs in mid-June for the summer crops is a welcome sign. 

"FY 15-16 average CPI inflation is forecasted at 5% (H1 FY 15-16: 4.5%, H2 FY 15-16: 5.5%). Monetary policy in the coming months is expected to remain data dependent", says Barclays. 

Despite the RBI's recent cautious guidance, the risk of another cut in H2 FY 15 remains, in our view. However, a potential cut will remain contingent on greater clarity on a number of factors, including trends in commodity prices, the monsoon outcome, the likely 2016 inflation trajectory and the impact of a potential Fed rate hike, possibly in H2 15.