Will the Weather Gods be kind to Dalal Street?

At a time when Dalal Street traders are fretting over the potential impact of Britain’s shocking decision to exit the European Union, some help from the heavens above may quell the ongoing volatility at domestic bourses and offer a major boost to Asia’s third biggest economy.

Yes, the focus is firmly on the progress of the Southwest Monsoon which is set to pick up pace in the coming days, cheering farmers, lending a boost to agricultural output and signaling higher rural demand.

If the monsoon pans out as predicted, increased farm incomes will be welcome news  for shares of automobile, agro, cement,  consumer durable and FMCG companies as demand from rural India, that makes up for almost 70 per cent of the country’s population, strengthens.

The India Metrological Department (IMD) has forecasted an above-normal monsoon for 2016 at 106 per cent of the Long Period Average (LPA), a massive relief after two straight years of sub-par rainfall. In its latest prediction, the country’s weather office sees monsoon rains ending later than usual this year.

A strong monsoon will boost agricultural GDP, helping the sector perform to potential, while enabling India to consolidate its position as the world’s fastest growing major economy by pushing growth close to the 8 per cent mark in FY 2016-17, bolstering the appetite for the country’s financial assets including equities.

Further, above-normal rainfall may help rein in inflation as prices of key food items are kept in check, giving the RBI more room for monetary accommodation to bolster demand and growth.

RBI hits pause button on rate cuts

The Reserve Bank of India has refrained from lowering policy rates in its second bi-monthly monetary policy review on Tuesday as it is monitoring the progress of the monsoon rains for cues over near-term inflationary trend in Asia’s third biggest economy.

As expected, the central bank retained the repo rate at 6.5 per cent after cutting it by 25 basis points in its April meeting. Banks' cash reserve ratio or CRR, the ratio of net demand and time liabilities kept with RBI, has also been kept static at 4 per cent.

RBI has cut the policy rate by nearly 150 basis points since January 2014 when it stood at 8 per cent.

The RBI’s decision came in against a backdrop of higher retail inflation in April, prospect of the interest rate hike by the Fed later this month and on the timely outburst of the monsoons.

The country’s consumer inflation, the RBI’s benchmark inflation gauge, accelerated to 5.39 per cent in April 2016 from 4.83 per cent in March 2016, leaving lesser room for a further interest rate cut in the near-term. Despite that, RBI has retained the inflation projection at 5 per cent announced in the April policy statement, though with an upside bias.

Further, it is hoping that an above-normal monsoon may boost agricultural output and keep a lid on food prices.

The RBI is also weighing the impact of heightened global economic uncertainties including the lack of clarity over the next US Federal Reserve interest rate hike and a possibility of Brexit - events which may risk capital outflows from the emerging markets.

The central bank warned that while inflation risks were on the upside, it retained its forecast for India’s GDP growth for the current financial year at 7.6 per cent.

Going forward, RBI expects demand conditions to improve as consumer confidence is seen rising on improving expectations of employment and spending, with rural demand aided by a stronger monsoon.