"If it comes true, then we are in for another year of good agriculture, low food inflation and on top of that we also have crude prices coming down which is another luck factor, we do not control it. So, these two things are bit positive for growth and they are also positive for inflation and thereby for monetary policy," says Dharmakirti Joshi, Chief Economist, Crisil
Help us understand how one should be reading into this news because it definitely does raise optimism.
Dharmakirti Joshi: Well, it does because the global environment is not very conducive and not very supportive and there is a lot of uncertainty coming from the global environment. So, domestic factors become very-very important and monsoon is a very important factor because agriculture still contributes about 18% to GDP and significant part of it is still unirrigated.
So, rains do make a difference and what it will do is, if it is well distributed over time and geographies, it will ensure that the food production is good and the food inflation also stays under check, and that means that RBI's rate cuts will continue and this is a positive signal for the rate cuts also because food inflation has already come down sharper than expected and on top of that normal monsoons which seem to be pretty well distributed as per the most recent forecast. If it comes true, then we are in for another year of good agriculture, low food inflation and on top of that we also have crude prices coming down which is another luck factor, we do not control it. So, these two things are bit positive for growth and they are also positive for inflation and thereby for monetary policy.
Is there any way which we can establish that earlier monsoon means X impact on the GDP and Y impact on the irrigation and Z impact on crops.
Dharmakirti Joshi: Not really. Actually, what it has done it has brought relief from the heat, but as far as agriculture is concerned, the months of July and August are the most important months. They impact agriculture output more profoundly. They are more correlated with what happens to agriculture.
We have seen years when the June was good. If I take you back to 2002, the June rainfall was very good, then you got a drought in July and August and everything, agriculture came crashing down. So, June is important if it is timely, but it is not the dominant factor influencing your agriculture.
But sometimes with the early onset of the monsoon it does impact the crop production as well in a negative sense. So, give us some sense that are you already getting to hear that because of this early monsoon some particular crops have got destroyed, can that impact the prices going ahead as well?
Dharmakirti Joshi: Not really. I mean, what I see in the market is that, well tomato prices have gone up, but that is transitory, so there is no perceptible impact on what kind of agriculture output we will get in 24-25. There are many other variables apart from rain. It is also how the heat or weather extremities play out, whether you get excess rain in pocket, all those things become critical from a full-year perspective. I would play down the process of monsoons being a few days earlier than expected.
Now, let us talk about inflation. As it is, inflation has come down. Can one be reasonably assured that in the near-term inflation will remain low? I mean, I will take potato and tomato and onions out, that is like one week depending on the geography and depending on the mundi you are going to, prices will vary.
Dharmakirti Joshi: Well, that is the base case assumption we are going with because last year food inflation was very high. So, the base effect is very high for food. So, we will get in inflation terms lower inflation this year if monsoon stay normal.
So, I am not too concerned on the food inflation front at this juncture, I mean given what information we have. Crude prices are also down and I think they do play out as softening impact on inflation. And then economy is expected to grow a little below its potential rate of 6.7%, so that means that the demand pressure on inflation will also not be high. So, I am pretty comfortable on our forecasts reflect that, that inflation is unlikely to be a pressure point in 25-26.
At what point in time Reserve Bank of India would say okay everything is in place.
Dharmakirti Joshi: Well, we are factoring in two rate cuts, one in June and one following that. After that, we believe that RBI will be on hold. The reason is that this year growth does need support, but next year you should see our forecast suggest 6.7-6.8% growth in 26-27, so that means the economy is returning back to its potential in the next year and policies are typically based on future outlook of the economy. They are also becoming data-driven now.
But from that angle, the RBI could take a pause after cutting rates by 50 basis point more and then be on hold for what kind of information comes in. But on the growth front we expect the economy to revert back to its potential and so there is no need for extra stimulus to the economy.
Help us understand how one should be reading into this news because it definitely does raise optimism.
Dharmakirti Joshi: Well, it does because the global environment is not very conducive and not very supportive and there is a lot of uncertainty coming from the global environment. So, domestic factors become very-very important and monsoon is a very important factor because agriculture still contributes about 18% to GDP and significant part of it is still unirrigated.
So, rains do make a difference and what it will do is, if it is well distributed over time and geographies, it will ensure that the food production is good and the food inflation also stays under check, and that means that RBI's rate cuts will continue and this is a positive signal for the rate cuts also because food inflation has already come down sharper than expected and on top of that normal monsoons which seem to be pretty well distributed as per the most recent forecast. If it comes true, then we are in for another year of good agriculture, low food inflation and on top of that we also have crude prices coming down which is another luck factor, we do not control it. So, these two things are bit positive for growth and they are also positive for inflation and thereby for monetary policy.
Is there any way which we can establish that earlier monsoon means X impact on the GDP and Y impact on the irrigation and Z impact on crops.
Dharmakirti Joshi: Not really. Actually, what it has done it has brought relief from the heat, but as far as agriculture is concerned, the months of July and August are the most important months. They impact agriculture output more profoundly. They are more correlated with what happens to agriculture.
We have seen years when the June was good. If I take you back to 2002, the June rainfall was very good, then you got a drought in July and August and everything, agriculture came crashing down. So, June is important if it is timely, but it is not the dominant factor influencing your agriculture.
But sometimes with the early onset of the monsoon it does impact the crop production as well in a negative sense. So, give us some sense that are you already getting to hear that because of this early monsoon some particular crops have got destroyed, can that impact the prices going ahead as well?
Dharmakirti Joshi: Not really. I mean, what I see in the market is that, well tomato prices have gone up, but that is transitory, so there is no perceptible impact on what kind of agriculture output we will get in 24-25. There are many other variables apart from rain. It is also how the heat or weather extremities play out, whether you get excess rain in pocket, all those things become critical from a full-year perspective. I would play down the process of monsoons being a few days earlier than expected.
Now, let us talk about inflation. As it is, inflation has come down. Can one be reasonably assured that in the near-term inflation will remain low? I mean, I will take potato and tomato and onions out, that is like one week depending on the geography and depending on the mundi you are going to, prices will vary.
Dharmakirti Joshi: Well, that is the base case assumption we are going with because last year food inflation was very high. So, the base effect is very high for food. So, we will get in inflation terms lower inflation this year if monsoon stay normal.
So, I am not too concerned on the food inflation front at this juncture, I mean given what information we have. Crude prices are also down and I think they do play out as softening impact on inflation. And then economy is expected to grow a little below its potential rate of 6.7%, so that means that the demand pressure on inflation will also not be high. So, I am pretty comfortable on our forecasts reflect that, that inflation is unlikely to be a pressure point in 25-26.
At what point in time Reserve Bank of India would say okay everything is in place.
Dharmakirti Joshi: Well, we are factoring in two rate cuts, one in June and one following that. After that, we believe that RBI will be on hold. The reason is that this year growth does need support, but next year you should see our forecast suggest 6.7-6.8% growth in 26-27, so that means the economy is returning back to its potential in the next year and policies are typically based on future outlook of the economy. They are also becoming data-driven now.
But from that angle, the RBI could take a pause after cutting rates by 50 basis point more and then be on hold for what kind of information comes in. But on the growth front we expect the economy to revert back to its potential and so there is no need for extra stimulus to the economy.
