Monsoon worries keep stock markets on edge

The bad news for the stock markets seem to be unending. Just when things were beginning to look up, in the form of an assertive action plan from the government, the monsoon has started playing the spoilsport.

“If rainfall is less than 20 per cent, there will be several repercussions. For one, the Reserve Bank of India may not be too keen to cut rates. Also, the government will be under pressure to come up with farm revival packages or loan waivers, which will put further pressure on government and bank finances,” said Rakesh Arora, managing director and head of research, Macquarie Research India.

With almost one third of the season over, rainfall until, last week was 23 per cent below the 50-year average. Sources said the food and agriculture ministries were expected to hold a meeting early next week to chart out a plan of action, if the monsoon deteriorates further.

Prabhat Awasthi, managing director & head of equity research, Nomura India, said, “It will be fair to say that the market is worried about the monsoon. But it is looking for more clarity on this front.”

He feels that given the slowdown in the economy, the ability to absorb another shock will be limited. “We have had droughts before, but the economy was doing rather well then. So, the impact was limited. This time, however, things are different.”

The problem is that while the overall corporate results are expected to disappoint, a bad monsoon will set back several key decisions. Market players said the start of the week could be positive, as global markets closed strong on Friday. But after that the market would seek guidance from key domestic events, such as inflation data and quarterly results of companies like Axis Bank, Bajaj Auto, Hero MotoCorp and Reliance Industries. Last week, the stock market ended its five-week winning streak, primarily due to Infosys’ weak numbers and monsoon concerns. The Nifty ended 1.75 per cent lower at 5,227.25 points.

The Indian stock markets have been among the best performers this calendar year, with the Nifty returning 13 per cent since January and foreign institutional investors pumping in almost $10 billion in the last seven months. Since June, it has risen a good eight per cent on reform hopes and positive global cues. However, this surge could be short-lived if drought fears come true.

Market players are keeping their fingers crossed and hoping for the best. “The season has begun poorly, but history shows that such starts can be improved upon substantially. It is also too early to tell if the rains, whether sufficient or not, would constitute a shock, substantial enough to affect GDP growth or the inflation outlook,” says a report by Deutsche Bank titled ‘Monsoon Matters’.

“No doubt the monsoon has been below normal but you need another three-four weeks to take a call on it,” said Piyush Garg, chief operating officer at ICICI Securities. He, however, said that if there is drought this year, it will be a ‘big headache for India’.

In 2008-09, when rainfall was 22 per cent less, the stock market tanked by more than 40 per cent. However, that was also a year when Lehman Brothers fell and there was a crisis in the financial markets worldwide. Also, as Awasthi puts it, 2008-09 was more like ‘momentum interrupted’ and quick recovery was possible. This time, we are already in a slowdown. Also, important decisions like a fuel price rise, expected after the Presidential elections, could take a backseat if the monsoon is bad.