IMD predicts a normal monsoon this year; how big is the El Nino risk?

Even though India Meteorological Department has predicted a normal south-west monsoon at 96 percent of the long period average (LPA), the development of the El Nino weather pattern remains a key concern for the Indian economy as it could impact the second half of the monsoon season significantly.

India Meteorological Department (IMD) has predicted a normal monsoon this year whereas private forecaster Skymet believes India can see below-normal rainfall following the development of the El Nino weather pattern.

What is El Nino?

El Niño means 'the Christ child' in Spanish.

In the 1600s, South American fishermen first noticed periods of unusually warm water in the Pacific Ocean which affected their catch of fish. Since it typically peaks around December, near Christmas time, this weather pattern was named as El Niño.

El Nino refers to the irregular recurring flow of warm surface waters from the Pacific Ocean toward and along the western coast of South America.

An unusually warm sea triggers evaporation which cools the ocean. Consequently, clouds are formed which heat up the atmosphere and raise global average surface temperatures. All of this impact the global climate. There are torrential rains in Peru and Ecuador, droughts in Australia, and harsh winters in parts of the US.

La Nina (which means Little Girl in Spanish) is the opposite of El Nino. Both El Nino and La Nina are part of the El Nino Southern Oscillation (ENSO) - the cycle of warm and cold sea surface temperatures of the central and eastern tropical Pacific Ocean.

How it affects India?

Indian economy is significantly dependent on monsoon rains. As per a Mint report, agriculture contributes about 43 percent to the incomes of farm households, and wages 34 percent. And Indian agriculture is still heavily dependent on monsoon.

During normal monsoon, moisture-laden winds blow from the western Pacific towards the Indian Ocean and India.

During an El Nino, this pattern reverses, bringing torrential rains over places like Peru, while India becomes relatively rain-starved.

As Mint reported, the transition from a La Nina to a neutral or an El Nino phase can trigger a significant monsoon deficit in India. In fact, 10 of the 13 droughts in India since 1950 have been during an El Nino.

In addition to agriculture, normal monsoon also influences food production, rural income and consumption, and employment, especially in agriculture-dependent regions that lead to subsequently contributing to economic growth.

How big is the risk this time?

IMD said the El Nino conditions may develop around July, and their impact may be felt in the second half of the monsoon season.

IMD hopes Indian Ocean Dipole (IOD) conditions will be favourable for the southwest monsoon.

IOD is the difference in sea surface temperature between the western pole of the Arabian Sea (western Indian Ocean) and an eastern pole in the eastern Indian Ocean south of Indonesia. This affects the climate of the Indian Ocean basin.

"Positive Indian Ocean Dipole (IOD) conditions are expected during the southwest monsoon season and the snow cover over the northern hemisphere and Eurasia has also been below normal from December 2022 to March 2023. Both these factors are considered favourable for the southwest monsoon," Mint quoted Mrutyunjay Mohapatra, Director General of Meteorology, IMD, saying so.

However, it is yet to be seen how the El Nino effect pans out this time.

Ashwin Patil, Senior Research Analyst at LKP Securities underscored that the normal range according to the weather experts is between 96-104 percent, while IMD has predicted it at the lowest end of this range which is 96 percent. So, it shows cautiousness.

"It can go either way. There is nothing to rejoice about at this point in time. Will have to wait and watch when El Nino sets in in the month of July. However, any positive risk to this prediction shall assist rural demand and thus two-wheelers, tractors and small car sales in FY24," said Patil.

SK Hozefa, CEO of Tradeplus agrees El Nino's impact on India's rainfall is a significant concern for investors in the agriculture, FMCG, and automobile sectors.

"As per reports, around 60 percent of all droughts in India in the past 130 years have coincided with an El Nino year. With agriculture making up 20 percent of India's GDP, any negative impact on crops such as rice, sugar, cereals, and pulses could lead to a shortage of essential food items and higher commodity prices for consumers," said Hozefa.

"The potential impact of a poor monsoon season extends beyond the agricultural sector, with over 30 percent of FMCG sales in India coming from rural areas. In addition, commercial vehicle and tractor companies depend entirely on rural sales. Any dip in rural sentiment due to a below-normal monsoon could potentially harm these sectors and impact the overall market. A number of sectors including cement, agrochemicals and fertilisers are directly related to the impact of poor monsoons," Hozefa said.

On the other hand, Shrey Jain, the founder and CEO of SAS Online - a deep discount broker underscored that IMD's forecast of a normal monsoon can have positive implications for the economy.

"Economic growth and monsoon are connected in several ways and play a crucial role in various aspects of the economy. A normal monsoon season with adequate rainfall can boost economic growth in rural areas, where agriculture is a significant source of livelihood and contributes to the overall GDP of the country," said Jain.

"Despite evolving El Nino conditions, a normal monsoon season can help stabilise food prices and inflation and can also reduce the need for government intervention through subsidies or price controls, which can impact fiscal policies and government budgets," said Jain.

In case of a strong El Nino effect, the country can see a rise in food inflation.

Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares and Stock Brokers pointed out that at 5.7 percent, retail inflation in March 2023 was below the consensus expectation. All major categories including the headline, food, fuel and core inflation rates decelerated on a year-over-year basis.

Yet, Hajra added that with a rise in month-over-month inflation rates for the headline, food and non-core inflation, it is clear that the softening is more due to the base effect rather than the reversal of price momentum.

He, however, believes that inflation will come below the 5 percent mark in the near future.

"Barring unforeseen developments, we expect these trends to continue with the inflation rate coming well below 5 percent in the near future. We expect the Reserve Bank of India to remain in pause mode during 2023. The better-than-expected inflation rate, as well as industrial production growth, would be positive for both the equity and bond markets," said Hajra.

Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.