India Macro Watch- Raining worries ::BofA Merrill Lynch,

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India Macro Watch
Raining worries  
Bottom line: Rains under a cloud…    
„ We grow increasingly worried at the prospect of poor rains when agflation is
already running high for almost 2 years. The Met has just announced that the
south-west monsoon will most likely be below normal at 90-96% of normal
downgrading its earlier 98% of normal forecast. Of even greater concern is that
rains during the sowing months of July (93%) and August (94%) are seen to be
relatively weak. As we have warned, the premature end of the La Nina, the
cooling of the Pacific that brings India rains, is hurting. Heavens forbid, but a
poor monsoon could pose a 50-75bp downside risk to our 7.8% FY12 growth
forecast. For details, do read our La Nina report.  
Why it matters?  … fuels agflation, growth risks
„ We assess that a poor monsoon, if it materializes, could pose a 50-75bp
downward risk to our 7.8% FY12 growth forecast. Given that the autumn
harvest is 7% of GDP, the direct impact of a poor crop on growth should be a
relatively muted 25bp. The bigger damage will likely come from RBI action to
anchor inflation expectations. Note a 5% swing in agflation impacts inflation by
175bp (Table 2). If poor rains do indeed sustain high agflation for a third year,
Governor Subbaro will find it very difficult to pause even in October (after our
expected 50bp of rate hikes). As it is, rising lending rates are already slowing
growth. We will review our macro forecasts in mid-July. Do see our growth
stress test report here.
Key points: What to watch: SOI, rains, sowing    
„ SOI: We advise investors to track the Southern Oscillation Index, (calculated
from the monthly or seasonal fluctuations in the air pressure difference
between Tahiti and Darwin) as a lead indicator for Indian rains. The SOI has
dropped to 2.6 from 25.1 on May 1 (Chart 1). If it stabilizes in the current
neutral zone between the La Nina (which needs a +8 read) and the El Nino
(which needs a -8 read), as the Australian weather bureau expects, the
monsoons may not be too badly affected. For daily readings, hit:
http://www.bom.gov.au/climate/enso/monitoring/soi30.png.
„ July-August rains: We would also watch the precipitation during the sowing
months of July-August. Besides, how much it rains, it is also important to see
where it rains. The only saving grace is that the Met expects a better spatial
distribution with all regions projected to get 90+% of normal rains.
„ Sowing: We would also monitor the sowing data that the Government has
already begun releasing every Friday. For ready reference, Table 3 presents
the cropping calendar for rice, the principal crop of the autumn harvest. A bit of
good news is that sugarcane cropping is slightly better than last year. Early
leads suggest a 25% jump in raw cotton sowing that should pull down prices




Bottom line: Rains under a cloud…    
„ We grow increasingly worried at the prospect of poor rains when agflation is
already running high for almost 2 years. The Met has just announced that the
south-west monsoon will most likely be below normal at 90-96% of normal
downgrading its earlier 98% of normal forecast. Of even greater concern is that
rains during the sowing months of July (93%) and August (94%) are seen to be
relatively weak. As we have warned, the premature end of the La Nina, the
cooling of the Pacific that brings India rains, is hurting. Heavens forbid, but a
poor monsoon could pose a 50-75bp downside risk to our 7.8% FY12 growth
forecast. For details, do read our La Nina report.  
Why it matters?  … fuels agflation, growth risks
„ We assess that a poor monsoon, if it materializes, could pose a 50-75bp
downward risk to our 7.8% FY12 growth forecast. Given that the autumn
harvest is 7% of GDP, the direct impact of a poor crop on growth should be a
relatively muted 25bp. The bigger damage will likely come from RBI action to
anchor inflation expectations. Note a 5% swing in agflation impacts inflation by
175bp (Table 2). If poor rains do indeed sustain high agflation for a third year,
Governor Subbaro will find it very difficult to pause even in October (after our
expected 50bp of rate hikes). As it is, rising lending rates are already slowing
growth. We will review our macro forecasts in mid-July. Do see our growth
stress test report here.
Key points: What to watch: SOI, rains, sowing    
„ SOI: We advise investors to track the Southern Oscillation Index, (calculated
from the monthly or seasonal fluctuations in the air pressure difference
between Tahiti and Darwin) as a lead indicator for Indian rains. The SOI has
dropped to 2.6 from 25.1 on May 1 (Chart 1). If it stabilizes in the current
neutral zone between the La Nina (which needs a +8 read) and the El Nino
(which needs a -8 read), as the Australian weather bureau expects, the
monsoons may not be too badly affected. For daily readings, hit:
http://www.bom.gov.au/climate/enso/monitoring/soi30.png.
„ July-August rains: We would also watch the precipitation during the sowing
months of July-August. Besides, how much it rains, it is also important to see
where it rains. The only saving grace is that the Met expects a better spatial
distribution with all regions projected to get 90+% of normal rains.
„ Sowing: We would also monitor the sowing data that the Government has
already begun releasing every Friday. For ready reference, Table 3 presents
the cropping calendar for rice, the principal crop of the autumn harvest. A bit of
good news is that sugarcane cropping is slightly better than last year. Early
leads suggest a 25% jump in raw cotton sowing that should pull down prices
further unless rains majorly disappoint.   .  
Next up in India: Gradual peak off in food inflation    
India: Food inflation (June 11), Thursday, 23 June 2011.