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Monsoon hits, markets soar, but concerns remain

LiveMint logoLiveMint 06-06-2014 Livemint

The Sensex climbed to an all-time high for a second day on continued optimism about policy reforms by the new government and the onset of the south-west monsoon.The S&P BSE Sensex gained 1.5% to 25,396.46 at the close, exceeding even the intra-day record of 25,375.63 reached on 16 May after the Bharatiya Janata Party won the strongest electoral mandate in three decades. Energy shares led Friday’s gains on optimism that Prime Minister Narendra Modi will agree to raise natural gas prices by the end of the month.

Graphics: Paras Jain/MintThe monsoon reached the southern coast in Kerala on Friday. “Rainfall is fairly widely distributed, and conditions are favourable for further advance of the monsoon in Kerala, Karnataka, Tamil Nadu and some parts of the North-East,” said L.S. Rathore, director general of meteorology at the India Meteorological Department (IMD). The weather office had earlier predicted the onset of the monsoon by 5 June, give or take four days.

Risks

To be sure, the monsoon could be patchy and the risk of the El Nino weather phenomenon, typically associated with scant rainfall in the subcontinent, still looms.

A below-normal monsoon could:

—Cause a setback to farm production and overall economic growth, which has fallen to below 5% in each of the past two fiscal years.

—Hamper plans to provide food security to two-thirds of the population if it food production falls below target.

—Spur food prices and stoke consumer price inflation, which accelerated to 8.58% in April.

—Higher inflation in turn would make it difficult for the Reserve Bank of India (RBI) to ease monetary policy. On Tuesday, RBI left the key repo rate unchanged at 8%.

—Squeeze demand in rural areas that are home to two-thirds of the population.

—Lead to an increase in government spending at a time when it’s critical to reduce deficits.

Reuters, Bloomberg and PTI contributed to this story.

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