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How poor rains will hit GDP growth

April 26, 2014 08:49 IST

A below-normal monsoon can bring down India's gross domestic product growth by 0.50-0.75 per cent this financial year, forcing the Reserve Bank to delay rate cuts to 2015, Bank of America-Merrill Lynch said.

"If the rains are normal, growth should climb to 5.4 per cent from 4.7 per cent last year. We estimate that poor rains will hurt growth by 50-75 bps," the US financial major said in a research report.

"With a normal monsoon, CPI inflation will likely soften to 7 per cent by March 2015, opening the possibility for RBI to cut rates by December. But an El Nino incident can push this to 8-10 per cent, delaying the rate cuts to 2015."

The Met Department on Thursday said the monsoon is expected to be below normal in 2014 because of the El Nino effect, arising from the warmer-than-average sea surface temperature in the central and eastern tropical Pacific Ocean.

The condition occurs every 4-12 years and had last impacted India's monsoon in 2009.

However, Deutsche Bank does not see much impact of a deficient monsoon, saying the agriculture sector matters less for overall growth, given that its relative share in the economy has reduced appreciably. Currently, the share of agriculture in India's GDP is 14 per cent, though the sector is still the largest employer.

Deutsche Bank noted that poor monsoons and associated production shortfall can be countered by policy action.

Advising investors to watch the July rains, the report said the July-August rains are critical to kharif crops and added an industrial recovery would be pushed back further if the RBI delays rate cuts due to rising inflation.

BofA-ML said it continues to be bearish on rural demand. "We continue to be bearish on rural demand. We estimate that the coming summer rabi harvest will see farm income growth drop to 10.3 per cent from 16.5 per cent last year," it said. 

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