Key Points

• India’s Southwest monsoon performance deteriorated meaningfully in August. It now faces a 11% rainfall deficit, down from a 5% surplus at the end of July. More importantly, the distribution of the monsoon was also concerning, with almost all agriculture producing states facing a deficit (see Charts 1 and Chart 2). This comes on the back of an increasingly likely El Nino event this year.
• There are at least three mitigating factors for India right now. First, tomato prices have come off their dizzying highs based on high frequency data, declining by around 50% as of September. Meanwhile, the pace of increase for rice and wheat prices has slowed, perhaps indicating some initial success from the government’s supply-side policies to control food prices (Charts 3 and 4).
• Second, while reservoir levels are below long-term averages across India, they are close to full capacity in North India. This is important because Northern states such as Uttar Pradesh and Punjab are key wheat producers (the most important Rabi crop), and also because North India has the best agriculture irrigation facilities to begin with to benefit from elevated reservoir levels.
• Third, Kharif crop sowing levels are around historical averages, which could bode well for production, although this is also dependent on rainfall from here.
• All these imply RBI should stay hawkish for longer, but the next move should still be a cut from June 2024 assuming food prices normalise. They also imply some near-term headwinds for INR, including through slower portfolio inflows.

CHART 1: INDIA'S MONSOON PERFORMANCE DETERIORATED MEANINGFULLY IN AUGUST, FOLLOWING A DECENT OUTCOME IN JULY

CHART 2: THE MONSOON'S DISTRIBUTION WAS ALSO CONCERNING, WITH KEY AGRICULTURE STATES GETTING LESS RAINFALL OVER THE PAST MONTH

CHART 3: THE GOOD NEWS IS THAT TOMATO PRICES HAVE CORRECTED FROM THEIR DIZZYING HIGHS

CHART 4: THE PACE OF INCREASE OF RICE AND WHEAT PRICES SEEMS TO HAVE SLOWED INTO SEPTEMBER