Should markets lose sleep over monsoon?

With key events like the general election and the Union Budget out of the way, the market participants are now focusing on the domestic factors such as corporate earnings to drive the next leg of the market rally. However a deficient monsoon, analysts say, has the potential to derail the possible rally.

 

Till now, on an all India weighted basis, cumulative rainfall was 43% below normal as per the overall country-wide data released by the India Meteorological Department (IMD) last month. However, the heavy downpour seen over the last few days has brought some relief. Met officials expect steady rains for the rest of July, particularly in the parched regions of central and northwest India, which should somewhat ease worries over inflation, water scarcity and a sub-par kharif crop, points out a Times of India report.

 

The crop sowing data available till the first week of July shows that there is a 55% drop in sowing activity as compared to the previous year. Macquarie Research, in its earlier assessment of the monsoon situation, expected 20-40 basis point (bps) dip in the GDP (gross domestic product) and 70-90 bps surge in inflation in case monsoon remained sub-par. However, the research outfit cautions that since most of the sowing happens by end of July, they would prefer to adopt a wait and watch policy over the coming weeks.

 

Market Impact

 

Markets have historically, beyond the initial blips, have taken poor monsoons in their stride (in 2004 and 2009). In 2004, the market did correct till June when it was clear that the country would receive deficient rainfall, but after the news was discounted, it entered into a four-year bull run. In 2009, except in July that saw a sharp correction on account of poor monsoon, market moved higher and closed at the year’s high.

 

Even though the monsoon has been poor till date in the current year, water levels in reservoirs are still at comfortable levels in most parts of the country.

 

The water storage level in reservoirs is important to meet the irrigation needs for summer and winter crop as well as for hydropower projects. The southern states of Andhra Pradesh, Karnataka, Kerala and Tamil Nadu could have had some reason to worry, as their reservoir levels are notably below the 10-year average. Recent reports however suggest that the situation could be improving, especially in Kerala that has seen heavy rains recently.

 

So even as the markets adopt a wait and watch policy, some analysts feel that its impact on the agriculture output is unlikely to be significant.

 

A report by R Sivakumar, head fixed income, Axis Mutual Fund, titled ‘El Nino – Myths and Reality’ suggests that thanks to better irrigation and technology, agriculture output has continued to grow in India in the last decade – even during some of the worst droughts in 2004 and 2009. The lower impact of poor monsoon on agriculture, says the report, could be attributed to larger share of winter crop (mostly irrigated) as compared to summer (mostly rainfed) as well as better agri-management during poor rainfall years.