Good rainfall forecast lifts Sensex, but history warns of a storm ahead

NEW DELHI: If the southwest monsoon – which hits the Kerala coast in the first week of June and then sweeps the length and breadth of the country till early October – results in 100 per cent rainfall this year, as projected by the Indian Meteorological Department (IMD), it would be only the fourth time in 13 years that the country will be witnessing abundant rainfall.

While the strong correlation between monsoon rains and the stock market has receded in recent years due to improved irrigation systems and various government schemes to protect the rural India, if the monsoon season actually pans out better than long-term averages, the market should greet it with better returns, as surplus rainfall is perceived to be market-friendly.

But that’s not quite the trend. Data showed since 2005, the Sensex has fallen up to 11 per cent in two of the three monsoon periods that resulted in surplus rainfalls.

In 2013, the BSE benchmark dropped 381 points, or 1.92 per cent, between June and September even when the rainfall was 105 per cent of long-term average, compared with estimates of 98 per cent.

In 2011, monsoon rainfall was 102 per cent of the long-term average, higher than 98 per cent (April forecast) and 95 per cent (June forecast) estimates that the weather agency had made.

The 30-pack index slumped 2,050 points, or 11 per cent, during that period to 18,053 level by September end from 16,453 at the end of May 2013, monthly data from BSE shows.

“While we do not doubt the role of monsoon in the economy, the perception of it being the lynchpin of rural prospects is certainly flawed. If it indeed was the manna from heaven, what explains the widespread rural distress and clamour for farm loan waiver amid plentiful rainfall and bumper crop (up 10 per cent YoY) in last two years? Similarly, how can one explain nearly a decade-long boom in rural India (2005-13) when the period had its fair share of bad monsoon? Further, why is the US farm sector, which is not rain-dependent, currently facing the most difficult period since the 1,980s?,” Edelweiss Securities asked in a note.

Last year, monsoon rainfall stood at 97 per cent, compared with expectation of 106 per cent of long-term average. Despite that, the benchmark equity index gave 4.6 per cent return during the period under review.

The index, meanwhile, rallied over 18 per cent during this period in 2007 and everyone knows what happened later.

“Historically, monsoon variations have triggered fluctuations in output, but rural wages have not been impacted. They seem to follow longer cycles, regardless of how rainfall has panned out from year to year. Going into FY18, even if the monsoon rainfall is normal, agri-output growth will moderate from a high base,” Edelweiss note said.


Edelweiss noted suggested 4 key elements other than output that drives the rural dynamic. They are global agri terms of trade, currency competitiveness, migration channel and government transfers.

"These forces shape rural India’s capex/productivity, wage, asset price and debt dynamic. We elaborate this through past 25 years’ rural cycles in India. Among the factors cited, a few have stopped being a drag, but none is likely to turn into a big support in FY18. We also find a striking resemblance in farm cycles in US and India, implying that global factors are at play. Notably, US farm distress started in 2014 and farm incomes are expected to decline for third year running in 2017," the brokerage said.