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Rains have improved in the past few days, in line with a better Indian Ocean Dipole, even though El-Nino trends remain strong. This has driven a modest improvement in the deficit and temporal distribution, though spatial distribution, reservoir levels and soil moisture are still points of weakness. El-Nino conditions have led edible oil prices above seasonal norms, higher temperatures have pushed vegetable prices higher, and concerns over the Rabi wheat crop (limited irrigation water) have helped wheat prices higher. These represent risks to inflation and inflation expectations.
Mild improvement in monsoon, but portents still weak
India rains have recently improved, but the deficit still remains high at 21.3% of Long Period Average. Current rains likely reflect fresh improvement in the Indian Ocean Dipole, though the El-Nino Seasonal Oscillator remains high with the Relative Nino 3.4 index at 1.74 degrees Celsius the highest for this time of the season in decades. There remains a strong relationship between El-Nino and weaker rainfall. Spatially, some states look good though an uncomfortably large part of the country has deficient rains. However, recent rains have taken rains until July so far above those seen in 2015.
Sowing trends still weak, with water stress still visible
There is also a relationship between weaker rains and lower agri output. This is also seen in lower area sown, as well as in higher rural unemployment and demand in job schemes. Reservoir levels are now below 10y averages, with soil moisture also somewhat depleted. Lower topsoil moisture is also seen in strong electricity demand to pump midsoil water. Despite higher food stocks after a record harvest, depletion of wheat stocks and limits to Rabi output given lower irrigation might be a risk going ahead.
Food prices already seen rising in the here and now, bringing inflation risks
With the above, wheat prices are already higher than last year, with higher than usual temperatures also leading prices of tomatoes and onions higher. El-Nino conditions also tend to impact output of palm oil from East Asia, driving up prices, which domestic prices are sensitive to. In line with this, palm oil prices are also considerably higher than normal. These developments are in wholesale prices, but transmission to retail prices can push inflation and inflation expectations higher.
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