IMD projects near-normal monsoon: But how big a factor is it for market?
It is a myth that monsoon has a significant bearing on our financial markets.
Skymet had last month projected below-normal southwest monsoon this year due to an El Niño effect. El Nino-led disruptions bring suppressed rainfalls in India. In last 20 droughts in India, 13 occurred during El Niño.
History suggests while stock investors do care about rural India (demand) and inflation, they are usually unfazed by monsoon-related news.
A good example is 2014, when IMD had predicted rainfall at 95 per cent of long-term averages in its April forecast and then went on to revise it downward to 93 per cent of LTA in June. The actual rainfall was even worse at 88 per cent of LTA. Yet the BSE Sensex surged 18.79 per cent during the May-September period.
In 2009, the BSE Sensex soared 50 per cent between May and September even as monsoon rainfall fell to 77 per cent of long-time average, far below a Met projection of 93 per cent.
The BSE Sensex has rallied seven times during May-September in last 10 monsoon seasons and 10 in last 15.
“If you look at years like 2004 and 2005, and also 2009 and 2014 from recent past, market performance during monsoon’s departures from long-term averages shows little correlation. There have been many instances when the market has rallied despite deficient rains. The relationship (between monsoon and Indian stock market) is weak and not very significant,” said Joseph Thomas, Head of Research at Emkay Wealth Management.
The ‘Great Indian Monsoon’ is only a marginal factor in the overall well-being of the Indian economy, as it accounts for only 15 per cent of GDP, argues Jimeet Modi of SAMCO Securities.
“Beginning 1979 since when Sensex data is available, there have been 22 occasions when the rainfall was in surplus, and 14 years when it was in deficit. Out of those 22 years of surplus rainfall, Sensex was in the red in four. In the 14 years of rain deficit, Sensex gave negative returns in only 4 years,” Modi said.
It is a myth that monsoon has a significant bearing on our financial markets. At best, it is only a talking point and nothing else, Modi insists.
Deepak Jasani, Head of Retail Research at HDFC Securities, says monsoon is key for the agriculture sector that accounts for 40 per cent of employment. Therefore, an extended poor monsoon season has potential to hit the economy, he says.
Jasani cited the year 2015 as a prime example, when the impact of monsoon got accentuated because of two back-to-back rainfall deficient years. Sensex fell 3.2 per cent during the monsoon season that year. In 2009, he said, the impact of poor rains was low as the market was in a recovery mode following the US sub-prime crisis.
The stock market is a function of a number of variables, including growth in earnings, interest rate trajectory, flows from local and foreign investors, relative valuations across emerging markets, risk-on or risk-off sentiments and is not dependent on the success or failure of monsoon rains, Jasani said.
Thomas said the impact of an actual shortfall is visible only in the subsequent periods or in the year following a drought or flood.
“Since India is a large geography, the spread of the rainfall or the special distribution is also important. If the deficiency is isolated, the impact may be very limited,” says he.
The expert said that a drop in agricultural output or production may have an influence on food inflation, which may lead to monetary tightening. “This hurts valuations of companies, which derive a significant share of their revenues from the rural economy,” Thomas said.
Consumption is one space where the impact of poor rainfalls can usually be felt.
The main problem arises after a bad monsoon when farmers have inadequate harvest to sell and, hence, the flow of money stops causing a deep dent in their pockets.
Data suggests India's summer monsoon accounts for almost 80 per cent of water requirement for agricultural crops. A 2018 paper published in the Journal of Hydrology by IIT Indore researchers claims only about 32 per cent of India’s land mass is resilient to water stress during the course of a single dry season.
Sectors such as FMCG, automobile, telecom, cement and tobacco, which are indirectly related to agriculture do feel the heat of a poor monsoon.
This year too, if the rainfall is deficient, sectors like FMCG, auto and microfinance institutions might be affected adversely, Thomas said.
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