The El Nino risk is expected to keep inflation elevated and Reserve Bank of India on a ‘long hold’ as the first rate cut by the central bank is likely in early 2015 rather than this December, says a report.
El Nino, which refers to warmer-than-average sea surface temperatures in the central and eastern tropical Pacific Ocean, will likely to keep CPI inflation up at 8-10 per cent in the second half of 2014 and will pose a 50-70 basis point risk to this fiscal's growth expectation, the report by financial services major Bank of America Merrill Lynch said.
El Nino occurs every four to 12 years and had last hit India's monsoon in 2009, leading to the worst drought in almost four decades.
"If rains are normal, Consumer Price Index inflation should drop to 7-7.5 per cent by March 2015.
“If the El Nino impacts the kharif harvest, rising food prices could push up CPI inflation to 8-10 per cent, essentially irrespective of monetary policy
The Indian Meteorological department early this week cut its June-September monsoon forecast to 93 per cent of the long-run average from an already below-normal 95 per cent projected earlier.
The chance of an El Nino during the monsoon has also been hiked to more than 70 per cent, from 60 per cent.
"We continue to expect the RBI to remain on long hold. An El Nino will likely push the first rate cut to early 2015 from December," the report said.
However, the report said the picture is likely to be clear only around July. A five per cent change in food prices impacts CPI inflation by 250 basis points.
The report estimates that an El Nino poses a 50-75 basis points risk to its 5.4 per cent FY14 growth forecast.
The Reserve Bank on June 3, left key rates unchanged and unlocked about Rs 40,000 crore (Rs 400 billion) of funds by reducing the amount of deposits banks are required to park in government securities.
This was the second time in a row that interest rates have been left unchanged amid demands for moderation to spur growth.