Summer monsoon in India is likely to be normal this year, the government said on Friday, allaying fears over an event crucial to the economic fate of the world’s second-most populous nation.

Rainfall is likely to be 98 percent of the long-term average, said the weather office, whose forecast is closely watched by commodities and financial markets as well as the government, which is battling to rein in inflation against a backdrop of intense protests over rising food prices.

“Rainfall for the country as a whole is likely to be normal,” B.P. Yadav, spokesman for the India Meteorological Office, told reporters, adding that the forecast model had an error margin of 5 percent.

Last year’s forecast for a normal monsoon was followed by India’s worst drought in 37 years, and analysts said that while Friday’s outlook was reassuring it was too early to celebrate given inaccurate predictions in the past and the importance of rainfall distribution.

“A forecast of normal monsoon will help allay the anxiety about the drop in food production and the resultant high levels of food price inflation we witnessed last year,” said Gaurav Kapur, senior economist at Royal Bank of Scotland in Mumbai.

“However, spatial distribution of the monsoon will also be critical as the year progresses,” he said.

Rainfall would be boosted by weakening of the El Nino phenomenon, which disrupts normal weather patterns, and the heat wave prevailing in northern India, Ajit Tyagi, director general of the India Meteorological Department, told reporters.

“Obviously, it is a good forecast. There is low probability of rainfall going below normal as of now. El Nino is in a declining phase, and it is approaching a neutral state.”

RAINFALL DISTRIBUTION

The monsoon winds bring 75 to 90 percent of the rainfall in most parts of India, the world’s top edible oils importer and biggest sugar consumer, and are vital for cane, rice and oilseeds crops as 60 percent of cultivated areas depend entirely on the rains for irrigation.

Yadav said the weather office would update its forecast every month from June, when the four-month monsoon season begins.

Last year, the government’s forecast of a normal monsoon proved wrong and India grappled instead with a baking drought that drove up food prices and disrupted electricity output.

“The long-trend forecast is notoriously unreliable and I wouldn’t put too much importance to it,” said Sujan Hajra, chief economist at Anand Rathi Securities.

For a graphic on India’s monsoon forecast vs actual rain see: http://graphics.thomsonreuters.com/10/04/IN_MSNFCT0410.gif

For a graphic on the link between India’s rice output monsoon, see http://graphics.thomsonreuters.com/10/04/IN_MSONRC0410.gif

For a graphic on rainfall in years following a drought, see http://graphics.thomsonreuters.com/10/04/IN_DRGHT0410.gif

India’s coalition government, led by the Congress party of Prime Minister Manmohan Singh, cannot afford another poor season that would further fuel food inflation, spur additional interest rate hikes and trim economic growth.

FARM OUTPUT

Good rainfall would help India’s farm output rebound after last year’s drought, which triggered a sustained rise in inflation that boosted food prices 17.7 percent in the 12 months to April 10, and fuel prices by 12.5 percent.

India is the world’s biggest sugar consumer. The outlook for the global market seemed gloomy ahead of the forecast, with New York raw sugar futures ending near a week’s low on Thursday.

Last year’s drought forced India to import a record 5 million tonnes of sugar and become the world’s top edible oil importer, replacing China, and also drove the government to consider imports of rice, a staple food for many citizens.

Prakash Naiknavare, managing director at Maharashtra State Cooperative Sugar Factories Federation, said India’s imports may halt.

“If monsoon remains normal, then certainly we will see a jump in sugar production… In 2010/11 we are estimating production of 22.5 million tonnes. In that scenario we don’t need imports,” he said.

Good rainfall would also boost purchasing power in villages, where two-thirds of the billion-plus Indians reside, raising demand for gold in the world’s top consumer.

“Monsoon is crucial for gold demand… Our is a farm-based economy good harvest helps gold buying in rural areas,” said Suresh Hundia, President, Bombay Bullion Association.

New York raw sugar futures were down 0.37 percent at 16.01 cents at 1345 GMT.

“This (forecast) will have a bearish impact on sugar prices and we may see weaker sugar prices today or tomorrow even though the news was largely discounted as we have had talks of a normal monsoon forecast,” said Emmanuel Jayet, head of agricultural commodities research at Societe Generale in Paris.

Good monsoon rains would also ease pressure on the central bank to further raise interest rates, analysts say.

On Tuesday, the Reserve Bank of India raised its key policy rates by 25 basis points each, a step that was in line with market expectations.

The summer monsoon rains traverse the subcontinent from its southern tip to the Himalayan north during the months of June to September.

(Additional reorting by Rajendra Jadhav, Sourav Mishra and Siddesh Mayenkar in MUMBAI and Naveen Thukal in SINGAPORE; Writing by Himangshu Watts; editing by Himani Sarkar and Ian Jones)

((himangshu.watts@thomsonreuters.com; +91 98108 20466; Reuters Messaging: himangshu.watts.reuters.com@reuters.net))