El Nino can push down GDP to 5%, spike inflation to over 8.5%

Singaporean brokerage DBS today said inflation in India may jump to over 8.5 per cent and GDP growth may slip to 5 per cent in the current fiscal if the much-feared El Nino threat plays out this year.

The El Nino entails unusually warm temperatures which disrupt rainfalls, while in the domestic context, it has been observed that the incident has coincided with weak Southwest monsoons.

Even the Reserve Bank of India had flagged this issue at its recent policy announcement, saying El Nino can have some impact on inflation.

"El-Nino could push CPI (Consumer Price Index) inflation off the RBI's glide path and up to 8 per cent by
January 15. Even a moderate 5 per cent increase in food index could lift headline inflation to 8.5 per cent," the DBS noted said.

The brokerage added that this may lower the scope for RBI to being more accommodative in its policy stance.

"Vegetable prices have entered their seasonal trough and further softening is unlikely... There are risks to the central forecast of 8 per cent CPI inflation by January 2015 stemming from a less-than-normal monsoon due to possible El Nino effects," the RBI had said on April 1.

On the growth front, DBS said a possible playing out of the El Nino factor may also impact agricultural growth, which can pull down the overall GDP growth as the strength in the industrial and service sectors has waned over the past two years.

"If (El Nino is) confirmed, GDP could remain stuck at 5 per cent," the brokerage said.