Drought could keep growth below 5% and delay rate cuts until 2015

MUMBAI: Bank of America's wealth management division, Merrill Lynch, has said a drought could drag down the economy's growth rate below 5%. At the same time it will result in consumer inflation remaining at 8-10% levels and rate cuts being delayed until 2015.

"The south-west monsoon is running almost 10 days late. Rains are currently a disastrous 45% below normal, although June accounts for only 15% of precipitation," said Indranil Sen Gupta, economist, DSP Merrill Lynch.

"We continue to estimate that an El Nino-induced drought poses a 50-75bp risk to our 5.4% FY15 growth forecast. There are typically three impacts. First, drought directly impacts the autumn kharif harvest (around 8% of GDP). A 3% swing, for example, would pull down growth by about 25bp. Second, there are second-round effects of the slowdown in agriculture that could be as large as the first. Finally, industrial recovery would be pushed back further if the RBI delays rate cuts due to rising agflation and inflation," Sen Gupta said in a report.

"At the same time poor rains will stick up consumer price inflation at 8-10%, even though we expect the government's supply side measures to ward off spikes in food prices. This should push back Reserve bank of India's rate cuts to 2015 from our base case of December," the report said.

http://timesofindia.indiatimes.com/followceleb.cms?alias=Indranil Sen Gupta,reserve bank of india,Merrill Lynch,Inflation,gdp

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