IMD's monsoon forecast: Too early for markets to run into rough weather

Indian Metrological Department (IMD) has predicted a normal monsoon season in 2017 (June - September) with a fair distribution across the country. Monsoon 2017, according to the government forecaster, will be qualitatively 96 per cent of long-period average (LPA), with a model error of plus or minus five per cent.

Private weather forecaster, Skymet, had recently predicted below-normal monsoon at 95% of the long-period average (LPA) and cautioned against sever heatwave conditions in northern India.

These forecasts assume importance as around 70% of India's rainfall happens in this period and irrigates almost half of the country's farmland, being of particular importance for Kharif crops. That apart, a sub-par monsoon can has the potential to fan inflation and impact the country's economic outlook.

"The impact of monsoon dynamics, as well as other inflation risks such as the goods and services tax, won't be clear for at least a few more months. In addition to the overall level, the timing of rainfall would be crucial. Higher rainfall in the early part of the monsoon may support sowing. However, adequate rainfall in the second half of the season would remain important for yields," explains Aditi Nayar, principal economist, ICRA Limited.

So, how are the markets likely to read into these developments?

Having run up around 17% since the start of calendar year 2017 (CY17), analysts feel the markets may still wait for the full impact, which will only be visible in the second half of calendar year 2017.

"The market response in the past has not been consistent. From a fundamental standpoint, a sub-par monsoon will impact the rural economy. In such a scenario, the government's response to such a situation becomes critical. Having said that, monsoon is difficult to predict and we still are in the month of April. I think the markets will respond to this as we go along and we have more credible rainfall data in the coming months," says Dhananjay Sinha, Head of Research and Strategist, Emkay Global Financial Services.

Besides monsoon, markets are also likely to react to other variables going ahead such as implementation of the goods and services tax (GST) bill, corporate earnings on the domestic front; and developments across the US, euro-zone, outcome of the elections in the United Kingdom, geopolitical situation and oil price trajectory are some of the events will impact market sentiment.

"Two consecutive normal monsoons will be good for the economy and will aide rural sector demand. Even if the monsoon is 90 per cent of the LPA, I think it will be good for the overall economy and will be taken positively by the markets. However, the markets have run up sharply in calendar year 2017 (CY17) and are waiting for a trigger to correct," says says G Chokkalingam, founder and managing director of Equinomics Research & Advisory.

"For now, I think the markets have crossed the first hurdle of monsoon and will keep a tab on events such as corporate earnings, GST implementation and other global developments," he adds.