Before investors could heave a sigh of relief on inflation, a potentially fresh threat emerged in the form of El Nino. In its February forecast, the US National Oceanic and Atmospheric Administration (NOAA) predicted the possibility of an El Niño year. For India, El Nino creates drier and hotter summers and a shorter monsoon. The good news is that the February forecast alone is insufficient to conclude that this year will be an El Niño.
“Based on February forecasts made over the past two decades, we note that six times NOAA reported a 45% or higher probability of El Niño in February, in only three years did El Niño actually pan out, while conditions were neutral (normal) in others,” analysts at Jefferies India Pvt Ltd said in a February 26 report. The India Meteorological Department’s first monsoon forecast in April assumes significance now.
View Full Image
Nevertheless, this risk cannot be ignored, given that El Niño could have an adverse impact on India’s agricultural output and inflation. The 55-60% chance of an El Niño in 2023 by NOAA is the highest in many years, the Jefferies report highlights.
India has received normal monsoon for the last four consecutive years. But this time, some parts of the country are already facing rising temperatures, raising concerns about heat waves. In fact, a longer-than-expected summer followed by scanty rains will reduce sowing, hurting rural incomes. So, clearly, it’s going to dampen sentiment.
Economists say the overall retail and food inflation has little to do with the weak monsoon. For agricultural production, much also depends on the spatial distribution of rainfall. However, in an El Nino scenario, prices of select food items may see an increase due to reduced supply. And in the current background, any increase in inflation is not desirable.
A report by Emkay Global Financial Services Limited states that the inflationary impact of El Nino on food inflation has been mixed, with average food inflation in El Nino years being lower than in non-El Nino years. “Given the already tight supply conditions and price pressures, prices are likely to remain more volatile this year,” said an MK report dated February 26.
Besides, increased use of fertilizers to maintain crop yields amid a muted monsoon could add to the government’s already inflated fertilizer subsidy bill.
A delayed rural recovery will mean weaker volumes for companies with a relatively higher risk appetite in rural India. “Consumer staples, discretionary and even automobiles will feel the heat to some extent, as inflation remains high and rural incomes lower,” said Deepak Jasani, head of retail research at HDFC Securities Ltd.
In the December quarter earnings call with the media, Hindustan Unilever Ltd said it expects rural demand to improve. Needless to say, the recovery in rural demand could be slow if the El Nino threat materialises.
Analysts at Jefferies said, “A weak monsoon will be detrimental to FMCG, but factors such as low base in rural areas and margin recovery should help in FY24.”
So far in the calendar year 23, the benchmark Nifty 50 index has fallen nearly 4% amid a fall in Adani Group shares.
Jasani said that at present, the stock market sentiment is weak, so a negative expectation like El Nino could mean some correction in stock prices, though the actual impact of such an event on earnings would be visible with a lag.
Know your inner investor
Do you have guts of steel or are you a victim of insomnia regarding your investments? Let’s define your investment approach.
catch all business News, market news, today’s fresh news events and Breaking News Update on Live Mint. download mint news app To get daily market updates.