Too Early To Celebrate Monsoon Cheer, Say Economists

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Indian stock markets surged to over three-month highs on a troika of positive data points released on Tuesday. The meteorological department forecast above average monsoon rains this year, retail inflation eased and factory output rebounded, giving wings to stock markets.

But economists sounded cautious, saying it may be too early to celebrate on the basis of these data points.

While the prediction of normal monsoon rains, after two years of back-to-back droughts, is a big positive, experts warned that monsoon forecast have gone terribly wrong in the past.

“It is not about the quantum of the monsoon per say. It is the distribution across time and space which is critical. Also, stochastic models used to conclude such predictions have a risk of going wrong,” said Abheek Barua, chief economist at HDFC Bank.

Kotak Institutional Equities in a note said, “Drawing implications from monsoon estimates for growth or prices will be premature at this juncture. The translation of strong/weak monsoon into production gain/loss and income gain/loss feeding into rise/fall in aggregate demand is too early to be factored in right now.”

Similarly, while retail inflation eased to a six-month low of 4.8 per cent in March , economists expressed doubt whether the reversal was sustainable.

“Journey to 4 per cent long term inflation, which is the long term target does not seem as easy as the couple of good data seen in the last month and this month would suggest,” Mr Barua told NDTV Profit.

Economists are also not too willing to read too much into the IIP (factory output) data released on Tuesday.

“Capital goods component of the IIP is very very fuzzy. IIP might not always capture growth or recovery story completely, said Mr Barua.

Mr. Barua expects to see one more rate cut this year provided food inflation remains soft and there is no major push from the global side on commodity front. RBI policy, according to him, from here on will be guided not only by the 5 per cent inflation target it wishes to achieve for the end of this fiscal year but also the long term 4 per cent target that it wants to move to. That will determine its policy choices and rate cut decisions from here on, he said.

Focus of market will turn to how the RBI’s liquidity game is played out and the focus on rate cuts might get a little diluted, he noted.