Is the Accelerating Monsoon responsible for the Decelerating Food Inflation?

According to the MET Department, India’s monsoon rainfall was 38% above normal in the past week, the highest weekly downpour in the current June September season.

Coincidently, during the same time, the food price inflation dipped to 9.67% for the first time this year, according to the Economic times dated, 30^th July, 2010.

The direct co-relation of India’s economic performance and farm output to the annual monsoon is well known, it is the global economies interestingly, which increasingly are getting wet in the process.

A case in point being the Last year’s draught, which affected the sugarcane carop real hard, and went on to eventually help lift even New York Raw Sugar Futures to the highest levels seen in the last 29 Years. (Source: Bloomberg.com)

In the Indian context, though the farm sector’s contribution to the GDP is just 14.5% (Source: FICCI Report on the Indian Economy, 2009-10), it happens to be the key source of income for the Indian rural which comprise as much is 2/3^rd of our population, which thus makes it important in perspective of the overall health of the Indian economy.

In simple terms, good monsoon raises the average farmers income, which leads to a rise in the rural consumption (volumes) leading to the rise in demand for fuel, cars, motorcycles, farm equipments like tractors, and consumer goods. Which intern gives boos to the ancillaries, and the related industries. A good analogy of the process would be a Mexican wave in the economy which stars from the Agriculture sector due to good rainfall!

As far as the current food inflation is concerned, while the parliament was facing a deadlock initiated by a determined opposition, the annual rate of inflation in the food price index fell to 9.67% in the week ended July 17^th, as compared to 12.47% in the previous week. (Source: Economic Times, 30^th July, 2010)

All in all, both the news items were received positively all across the market and in the concerned government departments...experts feel the inflation may dip further if the monsoon continues to be steady in delivery!

Karvy Private Wealth Team.