Finance Minister and RBI Governor Raghuram Rajan
Finance Minister and RBI Governor Raghuram RajanReuters

HSBC has said that the El Nino conditions could make it difficult for the Reserve Bank of India (RBI) to cut key policy rates beyond its June meeting.

The brokerage firm expects the RBI to cut rates by 25bps on 2 June.

Easing inflation and slowing industrial production have strengthened the case for repo rate cut by the RBI in June.

"If the monsoon is worse than feared, this will severely constrain the RBI's ability to ease policy over the medium-term, seeing that its CPI targets would be at risk," HSBC told DNA.

Last week, the Australian Meteorological Department had said that the tropical Pacific is witnessing early signs of El Nino conditions.

The El Nino effect could lead to below-normal rains, bringing down agricultural output and raising the spectre of food inflation. Data shows 10 out of 13 droughts that occurred since 1950 have had an El Nino connection.

The occurrence of El Nino in 2009 coincided with the worst drought in four decades in India.

Besides, the India Meteorological Department (IMD) has predicted a below-normal monsoon rainfall this year. A strong El Nino will severely affect countries that are highly dependent on agriculture, especially India.

HSBC expects inflation to go up in the second half of this year due to the El Nino effect. It adds that higher crude oil prices and supply side issues may add to worries on inflation.

A second consecutive year of weak monsoon will adversely affect agricultural activity in India. Food prices are already under pressure due to unseasonal rains, which caused severe damage to crops.

India has already witnessed a number of farmer suicides due to severe crop damages caused by unseasonal rains. Rural distress will intensify if monsoon rainfall turns out to be below normal.