Citi Research: Monsoon Watch – Clear Skies, Cloudy Outlook

India Macro View
Monsoon Watch – Clear Skies, Cloudy Outlook
 Monsoons Kick Off on a Dismal Note — The second estimates by the Indian Met
Dept predict rainfall for the season as “Normal” or 96% of the Long Period Average (v/s
99% as per the first estimate). However, monsoons have kicked off slowly, with cumulative rainfall from (June 1-20) being 26% below normal. A quick recap - India’s
Rohini Malkani
monsoon season, which runs through June-September, largely determines the
outcome of the summer (kharif) crop – which accounts for ~50% of total output. In addition to quantum, the temporal and spatial distribution of rainfall is also key. However, all is not lost, as the crucial month for sowing is July. (IMD predicts rainfall in July and August at 98% and 96% of LPA.)

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 Global Forecasts Don’t Paint a Good Picture — According to the Australian Bureau of Meteorology, climate indicators as depicted by the Southern Oscillation Index (SOI) are currently at neutral levels, but there is a possibility of an El Nino event occurring this year. The SOI, which signals El Nino episodes (warming of Sea Surface Temperatures leading to lower rainfall), dipped into the red in April (-7.1) and recovered (but stayed negative) in May at -2.7. Trends need a close watch, since sustained values in the -8 range would signify an El Nino event.
 Economy – Not Yet ‘Water-proof’ — Despite the changing composition of GDP (share of agri at 15% v/s 30%) and mitigating factors such as NREGA, growing share of winter crop, use of gold as a collateral, the economy is not yet water-proof. (1) Agriculture employs ~50% of the workforce. (2) Only ~36% of India’s land area is
irrigated. (3) Rainfall correlation with agri is (0.63) and private consumption (0.4).
 Macro Implications – Inflation Relatively More Impacted than Growth — Taking into account mitigating factors mentioned above, we reiterate our view that a poor monsoon would impact prices more than growth. While sub-par monsoons could shave
50-80bps off growth to 5.6-6% (see fig 6, pg 4), the impact on inflation is difficult to quantify. This is due to a combination of various ‘domestic’ structural factors and global factors impacting commodities and currencies. Our FY13 WPI estimate is 7.5%.
 Quick Go-To for the 2012 Monsoons — Six Websites to Monitor
– (1) Monsoons: http://www.imd.gov.in/section/nhac/dynamic/Monsoon_frame.htm.
– (2) Reservoir Storage levels: http://cwc.gov.in/Reservoir_level.htm
– (3) Crop Sowing and agri production: http://agricoop.nic.in/weather.htm
– (4) Food stocks/procurement of rice & wheat: http://www.fciweb.nic.in/stocks
– (5) NREGA Progress: www.nrega.nic.in
– (6) Southern Oscillation Index: http://www.bom.gov.au/climate/current/soi2.shtml