Poor India monsoon may prolong loose money policy

By Tony Munroe

MUMBAI (Reuters) - Worsening dry conditions in India threaten to dent a nascent recovery even as other parts of the economy show surprising strength, and may force the Reserve Bank to stick to its easy money policy longer than planned.

With time running out on the summer sowing season and increasingly gloomy reports from India's farm regions, economists warn that growth could lose as much as 2 percentage points in the current fiscal year if rains don't improve soon.

Between the start of the summer monsoon season on June 1 and Wednesday, rainfall was 29 percent below normal.

Despite June industrial output figures that far exceeded forecasts, as well as a surge in auto sales for July and signs of improving global conditions, some observers expect the Reserve Bank of India to stick to its pro-growth bias given the possible hit to rural demand resulting from a bad monsoon.

"I would think RBI would like to play it a bit safe and not rush into tightening at this point of time," said A. Prasanna, economist at ICICI Securities Primary Dealership.

"There was a possibility after the July policy (review) that you could have had some move in October itself. Now I think that probability is very low. So you're looking at January as the earliest when RBI could begin tightening," he said.

Bond spreads have begun to tighten from record levels as investors start pricing in an economic recovery and higher short-term rates, and some market players warn that investors could be caught out.

The inflation picture further complicates the RBI's job. Wholesale prices fell for the ninth straight week in the year through Aug. 1, but the food index gained 10 percent as the bad monsoon crimps output, and economists warn of looming inflation.