Finance Minister Arun Jaitley on Thursday dismissed fears of the first drought in six years, just days after the weather office downgraded the forecast for monsoon rains this summer.
An El Nino weather pattern has prompted weather officials to cut the forecast for the June-September rains, which are crucial to farm output and rural incomes, to 88 percent of the long-term average. Less rain could drive up food prices.
The arrival of monsoon rains has already been delayed by about a week, worrying both farmers and Prime Minister Narendra Modi's government, which is battling a rural slowdown. Reserve Bank governor Raghuram Rajan has said that any future easing of policy rates will depend on the government's handling of inadequate monsoon rains. “Going forward, room may absolutely open up if the monsoon is better than currently expected, or if government actions mitigate any potential rise in food prices and if energy prices stay contained,”
On Thursday, however, Jaitley called the concerns "misplaced", saying rainfall was likely to be deficient in regions with substantial irrigation facilities.
"For anybody to draw conclusions on that basis, on either inflation or some kind of distress situation, is far-fetched," Jaitley told reporters. "I don't anticipate any situation of this kind, even with the kind of predictions which have been made."
Prospects for poor rain have spooked investors as an inflation-wary central bank has explicitly tied further interest rate cuts to the monsoon's impact on food prices. A 12% deficit in normal monsoon showers dragged down growth in the farm and allied sectors to just 0.2% in 2014-15, compared with 3.6% a year earlier.
The hawkish guidance has led to a sell-off in Indian stocks and bonds as investors bet the Reserve Bank of India would be unable to cut rates, even if the economy struggled.
Jaitley said the government could resort to last year's strategy, when it released extra stocks of rice and wheat from state warehouses to offset the impact of poor monsoon rains.
"In any case, there is an abundance of food grains available," he said. "We have an option of dumping them in market."