- Date : 31/08/2021
- Read: 5 mins
An encouraging monsoon increases agricultural output, results in employment generation, pushes auto sales, and boosts consumer demand, thereby impacting all avenues of investment.
The monsoon in India is a major macroeconomic event that is enthusiastically tracked by investors. Deficient or excess rainfall leads to crop losses, resulting in lower earnings for farmers and also reduced rural demand and sales.
The southwest monsoon, which typically arrives in June and continues till September, is a crucial source of water and is necessary for agriculture, industry, and households in the country. More than 75% of India’s annual rainfall occurs during this period.
Often, a deficient rainfall forecast results in a dip in the equity market the following day, while a normal rainfall forecast result leads to sharper reactions on both sides. A good monsoon comes as a relief and sentiment booster for market participants.
What explains this phenomenon? Well, monsoon rains are crucial for agriculture output as over 55% of arable land is rain-fed. When it comes to food production, nearly 44% of the total produce depends on the June-September southwest monsoon.
Good rains have the potential to boost growth in the agricultural sector, thereby contributing to headline growth. On the flip side, inadequate rain has the capability to shave off 30-50 basis points from the growth forecast.
Impact on agriculture
The monsoon is a key factor affecting stock markets and the entire economy, given the massive agricultural activity in India. Monsoon rains are critical for the farm sector, which accounts for about 15% of India’s $2.5 trillion economy and employs more than half of India’s 1.3 billion population.
Considering the huge reliance on agriculture as a source of income, adequate rain implies a bumper harvest of crops, which makes farmers cash-rich. As monsoon brings cheer in rural areas, it boosts rural demand and spurs economic growth. This translates into pent-up demand and larger spend on consumer durables, FMCG goods, tractors, fertilisers and pesticides, among others.
The result? Companies operating in these sectors, along with industries providing raw material to them, stand to gain.
Impact on stock markets
If you have invested in stocks of the companies operating in the sectors mentioned above, your investment too will gain. All companies with an exposure to the rural segment ride on the hope of better sales, translating into better earnings for these companies in the future quarters.
Early monsoon is always a sign of happiness for the stock markets. Usually, markets react positively to normal or above average monsoon due to increased farm production.
Industries that stand to gain
Some companies that stand to gain from good monsoon are those engaged in the manufacturing of packaged goods, two-wheelers, tractors, consumer durables, and fertilisers. On the other hand, some sectors like cement, infrastructure, and building construction are negatively affected due to the monsoon as construction activity is halted during these months, leading to sluggish performance of these companies.
So, if you have invested in the stocks of companies engaged in the above activities, your investment may get negatively impacted.
Is there a flip side?
There’s another way to look at this – any fall in the stock market due to monsoon concerns is always a fresh buying opportunity. Secondly, if the monsoon is good, even the government can push reforms. And this again benefits all kinds of investments. Any negative news about the monsoon will cause a huge negative sentiment as companies with rural exposure come under stress owing to tepid sales.
Impact on inflation
A poor monsoon delays planting and produces smaller yields and lower output of water-intensive kharif crops such as rice, corn, sugarcane, and oilseeds. There is an indirect correlation as this drives up prices due to a demand-supply mismatch and accelerates food inflation, which is a key focus area for India’s central bank for lowering interest rates.
So, the first few months of rainfall are crucial for Kharif production. Deficient monsoon also affects the rabi crop-growing season, which is almost completely dependent on irrigation.
A normal monsoon indicates that food inflation remains in check, ensuring that consumer price index (CPI)-based inflation is at an average of 5%. In case if the monsoon is as expected, this could lead to a repo rate cut of at least 25 basis points.
Impact on gold
Historically, there has always been a correlation between gold consumption and the monsoon. A good monsoon leads to increased disposable income in the hands of the rural populace, which in turn leads to higher investments in gold. Two-thirds of India’s gold demand comes from rural areas.
Gold is the ultimate store of value for Indian farmers. If demand rises, price of gold will also increase. So, if you have made an investment in gold, it will stand to benefit. In the case of a good monsoon, demand could rise by as much as 10%.
The amount of rainfall affects food production in the country, but this doesn’t necessarily translate into a macroeconomic impact due to food supply management by the government and availability of stored water in the reservoirs.