You are here: Home » Markets » Features
Business Standard

Markets cheer monsoon forecast; analysts advise caution

True impact can only be gauged in the second half of CY16, analysts say. Global headwinds will also have a bearing, they add


Puneet Wadhwa  |  New Delhi 

The final word on revised GDP

    Fiscal prudence tops market players' Budget wish list

    Will the markets see Santa Claus rally in December?

    Don't see much upside in the markets till at least a quarter: U R Bhat

    Market participants: Pain will not go away quickly

    Markets shrug off Q2 GDP as RBI keeps key rates unchanged

From a closing level of 6,987 on February 29 when the government presented the Union Budget for FY17, the have gained ground steadily with the Nifty rallying over 800 points, or 12%, to reclaim 7,800 levels. This is the first time that the index has hit the 7,800 mark since January 06. Also Read: Sensex zooms 400 points on key eco data, good monsoon forecast

Government sticking to its earlier fiscal deficit target projection of 3.5% of GDP (gross domestic product) for FY17, interest rate cut by the Reserve Bank of India (RBI), fall in consumer price inflation (CPI) to a six-month low; and interest rate outlook by the US Federal Reserve for calendar year 2016 (CY16) at the global level are some of the factors that have aided sentiment. Also Read: At 106% rainfall, IMD predicts above-normal monsoon in 2016

The upbeat sentiment since the past few days, however, has been on account projection of a normal this year by Indian and foreign forecasters - Indian Metrological Department (IMD) and Skymet - after two consecutive years (2014 and 2015) of bad monsoons.

"The market rally had begun in anticipation of a normal Also, there is an expectation that the direction for the IIP (index of industrial production) - that has been negative till now - will change. Inflation, too, has come down. All this has also brought back FIIs (foreign institutional investors) into the market," says U R Bhat, managing director, Dalton Capital Advisors. Also Read: IMF retains India's growth forecast, cuts global projection

While the have given a thumbs-up to the forecast, analysts say that it may be a little too early to rejoice the prediction as the real impact of a normal monsoon will only be visible in the second half of calendar year 2016 (CY16).

"Above-normal rains could support food grain output and lift agricultural incomes, acting as a tailwind to GDP growth. Both the spatial (geographical areas) and temporal (over time) rainfall distribution are as important. We find that the correlation between annual food grain production and rainfall is highest for the month of July. Hence, the true impact of rainfall on agriculture output will be known by mid-July, when the sowing season will be in full swing.

Meanwhile, we do not expect normal rains to alter the food price inflation trajectory significantly," points out Sonal Varma, executive director and India Economist at Nomura in a co-authored report with Neha Saraf. Also Read: Rural themes to get a monsoon boost

Bhat of Dalton also believes that there is more jubilation in the than what is warranted, as the impact will can only be ascertained later in the year.

"It is typical of the markets to overdo positive news. While the Nifty can hit 8,000 going ahead in the backdrop of this current sentiment and a few good early March quarter results of India Inc, I believe the markets will start correcting once the not-so-good results start flowing in, say by May-mid," he says. Also Read: Agri-based stocks firm up on above normal monsoon forecast

While the domestic economic data has been positive, analysts also caution against the global headwinds, which have the potential to puncture the market rally.

Vaibhav Sanghavi, managing director, Ambit Investment Advisors, explains: "The market has been supported by FII flows, which is a result of global weakness in US dollar. As a result, money has found its way back into risk assets. The global central bankers have been successful in getting the dollar to weaken, and in turn, stabilise commodity prices. The domestic economic data, too, has been supportive. Till the time US dollar continues to remain weak and the expectation of a rate hike by the US Federal Reserve remain low, the global liquidity will keep markets buoyant. The overall market direction will continue to remain positive till the global liquidity tap remains open."

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Wed, April 13 2016. 10:58 IST