Normal monsoon crucial to India's continuing recovery, says StanChart

A normal monsoon is critical to India's continuing recovery, as a rise in agricultural growth could add 30-45 basis points to gross domestic product (GDP) growth, says a Standard Chartered report.

According to the global financial services major, domestic factors are likely to shape India's economic growth prospects amid global economic and political uncertainty and hence, performance of monsoon has gained importance in this fiscal year.

"A normal monsoon, after a gap of two years, will likely boost agricultural production and thus rural demand," Standard Chartered said in a research note adding that "a rise in agricultural growth to 3-4% from 1.1% in 2015-16 could add 30-45 basis points to GDP growth."

According to the report, monsoon's impact on food inflation would be primarily via pulses as distribution of rainfall in pulse-growing states is uneven.

"Pulses are highly sensitive to rains, as only around 16% of pulse-growing areas have access to irrigation facilities. With pulse inflation sticky at around 34% in the past 12 months, a better monsoon would reduce price pressure in pulses and in turn food inflation," it said.

On the Reserve Bank of India's (RBI) policy rate stance, the report said there is a likelihood of another 25 basis points rate cut in this fiscal year.

"A faster-than-expected decline in price pressures in food due to a normal monsoon is likely to make room for another 25 basis points of rate cuts in 2016-17," the report said.

In the June policy review meet, RBI Governor Raghuram Rajan kept interest rates intact, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.

The industry is still hopeful of further rate reduction from the central bank to boost investment.