Tuesday's Talking Points
Monsoon – A Reassuring Start?
In a déjà vu from 2022’s monsoon season, Indian monsoon has recovered from deficient rainfall at the start of the monsoon season to a surplus. Despite IMD (India Meteorological Department) projections of a normal monsoon, there were concerns for this year’s monsoon due to the risk of El Niño. Therefore, the normal monsoon thus far is reassuring. In fact, a recent RBI working paper highlighted lower impact of El Niño in years with Indian Ocean Dipole being favourable.
What is the Current Situation?
Data from IMD suggests that monsoon till July 10, 2023 have been above Long Period Average (LPA) by ~2% - which meets the definition of ‘normal’ rainfall, i.e. 96% to 104% of rainfall. This surplus of 2% is significantly better than the 10% deficiency seen in monsoon at the start of this month.
Source: Centre for Monitoring Indian Economy (CMIE), IMD
Moreover, reservoir levels are also healthy, with current reservoir levels at 29% of full capacity, above the long period average of 26% at this time of the year.
Source: CMIE, IMD
In spatial terms (region and sub region wise rainfall), the distribution appears uneven, as north and west regions seem to have had higher than normal rainfall, south and east continue to be lower than periodic average. Spatial and temporal spread of the rainfall are critical components, and will be closely monitored.
What now?
July is one of the most crucial months for monsoon, as it accounts for ~33% of the total seasonal rainfall. July is also the month when sowing tends to gather momentum. Increase in rainfall in July therefore bodes well for the overall agricultural sentiment.
Soft Landing for a Strong Patch of Above Normal Rainfall
The La Niña phase seen in the recent past – 2019-20 to 2022-23 – saw India getting above normal rainfall. Such a long period of above normal monsoons has been rare in recorded history.
Source: Centre for Monitoring Indian Economy (CMIE)
Conclusion
While increased rainfall in July bodes well for the overall agricultural and rural sentiment, the significance of rainfall has been decreasing over time. Agricultural dependency on rainfall has fallen with the rise in area of land under irrigation – from 44% in 2000-01 to 57% in 2019-20 (Source: Ministry of Agriculture and Farmer’s Welfare). The historical correlation (2009-10 to 2022-23) between the rainfall deviation from the normal and the Gross Value Added of the agriculture, forestry and fishing has been low – at 0.18. In fact, non-farm incomes have also seen an increase, with more than 35% of rural income now being non-farm based.
Improving monsoon picture is beneficial form an inflation outlook point of view. In the meeting of the Monetary Policy Committee held in June 2023, it was acknowledged that the headline inflation was still above the target, and expected to remain the same, according to their projections for 2023-24. From the MPC meeting's minutes, it's clear that each member considered the monsoon's impact, but they differed in their views on its influence over their decision-making. Therefore, close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Niño remain uncertain.
Improving monsoon numbers bode well for consumption, as it boosts rural incomes and lowers inflation expectations. They are also a shot in the arm for Indian Equity Markets, which are also currently witnessing strong inflows from foreign institutional investors. It is important to note that Indian monsoon are currently trending above the long period average, and could therefore end up making 2023 the fifth consecutive year of above normal rainfall!
Sources: CMIE, IMD, Reserve Bank of India, and other publicly available information.
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