- The progress of India’s Southwest Monsoon and Kharif crop has been quite good so far, with rainfall 8% above long-term averages and overall Kharif crop sowing areas also around 10% above last year’s.
- Beyond averages, the distribution of rain has also been improving across key agriculture producing states, with the exception of some rice-producing areas (see charts and details inside the report).
- If these positive monsoon trends continue, India’s growth should improve further and inflation should remain moderate, lending support to our forecast for INR to strengthen modestly and RBI to cut rates once more.
- We mark-to-market our USD/INR forecast, and now see USD/INR at 84.00 by 1Q2026 (calendar year), from 83.50 previously. More importantly, the forward looking drivers we highlighted previously remain largely unchanged (India: Art of the deal). Stronger growth and manageable inflation should encourage more capital inflows. Meanwhile, we continue to assume that the US and India will reach a trade deal, even if skeletal at first, which should help bring some certainty to tariff rates and attract additional manufacturing activity. In addition, our global team’s forecast for further Dollar weakness and for the Fed to cut rates by more than priced continues to provide a decent backdrop for USD/INR to fall, even as INR is likely to underperform the likes of EUR and JPY.
- What has changed for India has been the multitude of geopolitical shocks, most recently in the oil price spikes post the Israel-Iran war (Asia: Impact of oil price shock), and earlier in May in the India and Pakistan conflict (India and Pakistan conflict).
- We implicitly assume a status quo in these geopolitical conflicts, and for oil prices to converge over time to its fundamentals of an oversupplied market, but suffice to say there remains some residual left tail risks in this regard for INR.
- We maintain our view for RBI to cut rates once more by 25bps likely in the December meeting, and then keep rates thereafter for an extended pause. We think is some room for INR bond yields to continue to grind lower given where we are still in the cycle. We view the latest moves by RBI to withdraw liquidity as putting a near-term floor on money market rates rather than actively pulling them up to the repo rate. Nonetheless, we will have to watch RBI’s actions over time to validate that view and see if RBI is moving towards a more active liquidity withdrawal regime, which we stress is not our base case.
Details:
- While it is of course still early days, and the progress of India’s Southwest Monsoon could stall over the next few months, the good news is that rainfall has been running around 8% above long-term averages across all of India as of the latest data for June 2025. This also comes with an earlier than usual onset of rains in May.
- In tracking the Monsoon and the impact to India’s macro outlook, what is just as if not more important is also the distribution of rainfall across states, beyond the averages across India.
- On that front, the positive news is that many key agriculture producing states are also seeing above than normal rainfall, including the likes of Punjab, Rajasthan, Madhya Pradesh and Jharkhand. Nonetheless, progress has been slow in some rice producing states such as Bihar, Telangana, and Chhattisgarh.
- Overall, Kharif crop sowing trends have also been quite good, with overall crop sowing running above the trends seen over the past two years, and in particular 10% above 2024 levels. For key crops such as rice and pulses, this is running 58% and 42% above last year’s respectively. Reservoir levels are also filling up above last year’s pace, albeit somewhat slower in states in North and Central India.
- Putting it all together, the key macro implication for India is that we have greater confidence in our forecasts for growth to improve, and also for inflation to surprise on the downside including against RBI’s current CPI inflation forecast of 3.7% for FY2025/26 (MUFG: 3.4%). Latest high frequency growth numbers show some tentative signs of improvement with indicators such as consumer goods imports, gasoline consumption and domestic air passenger traffic picking up, together with some acceleration in government infrastructure spending.
- We continue to forecast INR strengthening against the US Dollar on the back of better growth-inflation dynamics, prospects of a India-US trade deal, a manageable current account deficit, coupled with our global team’s forecast for a weaker Dollar and 100bps of Fed rate cuts.
- We also expect RBI to cut rates by 25bps by the December meeting, bringing the repo rate to 5.25%, before pausing rates for an extended period thereafter.
