Will this monsoon be good enough to rein in inflation?

Monsoon is the focus area for market, which is currently surprised by a retail inflation that is at its 21-month peak.

The consumer price index for May 2016, rose to 5.8% from 5.4% in April. This was largely driven by rise in food inflation which stood at 7.55% from 6.40% of the previous month.  

This would be the second month were inflation has surpassed Reserve Bank of India’s (RBI) comfort level. Raghuram Rajan, Governor, RBI, while presenting its second bi-monthly monetary policy remained firm on its target of attaining 5% inflation for January 2017.

In the May charts, pulses & products were among the major contributors for inflation, at 31.8%, followed by sugar & confectionary, at 14% and vegetables, at 10.8%. Inflation in protein-related products stood at 17.4%, growing for the 12th consecutive month (since June 2015).

Consumer food price index in rural and urban region stood at 7.75% and 7.24%, while that of general CPI for regions stood at 6.45% and 4.89% respectively.

Can monsoon turnaround food prices?

As per Crisil, food inflation is expected to come down if the monsoon season is indeed favourable. A good monsoon means that food production in India will increase which will erase the pains of past two years’ droughts. Food prices, on the back of better production, will hence come down.

Indian Meteorological Department (IMD) has predicted an above-average monsoon with rainfall at 106% in 2016. Also, it expects a 50% chance of a La Nina occurrence, which results in ample rainfall across India.

Agriculture sector suffered two years drought which led a toll on production of fruits, vegetables, milk and poultry in recent weeks. Total output of production has fallen by 2% in rice, 12% in coarse cereals, 0.5% in pulses, 4% in sugarcane and 6% in oil seeds.

However, in regards to rate cuts, RBI will further seek clarity on monsoon, global crude oil prices, macroeconomic and financial developments.   

But is this monsoon going to be enough for inflation to come back to under 5%?