Rains swing stocks, not economy

Markets posted strong returns when monsoons have been above average

Monsoon continues to remain an important factor in deciding the direction of Indian stock markets, but its effect on the broad economy is less pronounced, says a study.

In the past decade, five out of six times when India saw an average-to-above average monsoon, the Bombay Stock Exchange (BSE) benchmark Sensex posted strong gains through June-October, with the only exception being 2008, according to the study conducted by Mumbai-based ICICI Securities.

“Good monsoons in general bode well for the equity markets. The markets have posted strong returns through June-October in years when monsoons have been above average,” says the report. Further, the fund flows from the foreign institutional investors (FIIs) also have been strong during good monsoons. “FII inflows in June-October during good monsoons have contributed to 70 per cent of the total flows in that year,” the report adds.

The study further points out that good monsoons and strong agriculture growth go hand-in-hand. In the last decade, each of the four times when monsoons were moderate to good, agricultural growth was strong. Monsoon is vital for India as 60 per cent of the net sown area is still dependent on rainfall.

Moreover, good monsoon season has typically helped to keep inflation under check. Here it gains importance as demon of inflation has put the government under pressure. But, the study states, “bad monsoons do not necessarily mean high inflation as extraneous factors such as crude oil prices come into play.”

During the past decade, monsoons and gross domestic product (GDP) growth have shown a moderate correlation. “Agriculture's contribution to overall GDP has contracted from 24 per cent a decade back to a little under 15 per cent at present,” the report says.

For instance, from 2000 to 2002, the country saw a deficient rainfall accompanied by muted GDP growth. “This in part was due to a global slowdown during the same period,” elaborates the report. It further adds strong economic growth in 2006-07 and 2007-08 and subsequent slowdown in 2008-09 too was driven by global factors than by monsoons.

The study points out that monsoons have little bearing on capital formation or state deficits. At the same time, it has little impact on agricultural credit growth and auto sales.

“Though household savings have gone up in tandem with monsoons, capital formation remains unaffected,” the study pinpoints. It says that monsoons also fail to have impact on discretionary and non-discretionary spending post monsoon construction activity. “FMCG and consumer durables sales are primarily driven by lifestyle changes, disposable incomes and economic growth and much less by monsoons.”