The economic recovery in rural India will get a boost from the weather department's forecast of a normal monsoon season for the third straight year, according to most brokerage houses.
The government announced a minimum of 50 percent margin on crops, implying a 15 percent rise in minimum support prices. This along with the support of normal monsoon may increase rural income, CLSA said in a report.
Another normal monsoon and the government’s focus on rural development implies that rural income levels could rise faster in financial year 2019.CLSA Report
However, brokerages remain divided on their view on the Reserve Bank of India's decision after the forecast. RBI would act only when there is an adverse impact from monsoon, said Kotak Securities, while Bank of America Merrill Lynch expects the banking regulator to cut its policy rate by 25 basis points in case normal rains do occur.
Here’s what the brokerages had to say on the monsoon forecast:
- Normal monsoon to aid rural recovery
- La Nina is generally considered positive for monsoon rainfall.
- Higher MSPs can increase rural income by Rs 0.5 -0.7 lakh crore (US$ 10 billion).
- Farm loan waivers to increase the disposable income of the farmers although this could lead to higher inflation
- Expect a 30-50 basis points incremental impact from MSP hikes on inflation.
- Normal monsoon and the government’s focus on rural development implies that rural income levels could rise faster in financial year 2019
- Key beneficiaries: ITC, Emami, Mahindra and Mahindra, Godrej Consumer and Ramco
- IMD forecast to bode well for the rural sector
- Premature to conclude on the effects of the forecast on growth and prices
- RBI Rate Decision: Expects an extended pause. RBI will be on a wait-and-watch mode until significant adverse impact from monsoon
- Spatial and temporal distribution of the monsoon needs to be watched for gauging the impact on food prices
- Do not expect any adverse impact on underlying food inflation trends given the projection of a normal monsoon
- Government's procurement policy of crops will be key to watch to assess the impact on food inflation.
Bank of America Merrill Lynch
- RBI Rate Decision : Normal rains should help the Reserve Bank of India to cut its policy rate by 25 basis points which will be positive for bonds and rural demand
- Sees RBI's inflation risks as overdone. Growth is well below potential and that is hardly likely to be inflationary