Impact of monsoon on stock market

Posted By : Team SMI

“Into each life, some rain should fall” goes the quote of Henry Longfellow.

A lot is said about the beauty and charm of monsoons. It is undeniably true that we eagerly wait for the first showers to bring freshness into our life. Then the monsoon sets in, and we feel enlivened by the verdure around, and the delightful monsoon medley. That is the magnificence of monsoons.
Yes, monsoons spell prosperity and peace. Thinking about monsoons from the perspective of the Indian economy, it is insightful to understand how rain impacts the Indian agricultural sector and its economy

Despite making big strides in the industrial sector and services domain, it is a serious fact worth noting that more than 70% of India’s population is dependent on agricultural sector which thus forms the backbone of Indian economy.
The monsoon is critical to replenishment of nearly 81 reservoirs, essential for power generation, irrigation and drinking. About half of India’s farm output comes from summer-sown Kharif crops. The production of food grains depends fairly on the amount and distribution of monsoon rainfall over the country.
Monsoon rains are critical for the farm sector, which employs more than half of India’s population. Vagaries in monsoons delays planting, adversely affecting crop production.

Economy rides on the strength of Monsoon:
India, with a strong agrarian economy that contributes 17% of its GDP (Gross Domestic Product), depends a lot on the performance of the monsoon.

GDP is the monetary value of all finished goods & services produced in a country. In simple terms, GDP is a broad measurement of a nation’s economic activity.
Any kind of divergence from the normal progress, or distribution, will directly impact the agricultural output and thus, have a cascading impact on the economy, food inflation and then the consumer spending.

Monsoon’s impact on Agricultural produce:

Impact on Kharif crops:
As we are aware, monsoon rains are critical for the agricultural sector as India receives around 70 percent of its annual rainfall during the monsoon season. This affects the yield of some crucial Kharif, or summer crops like rice, pulses, and oilseeds such as soybeans. Farmers start planting these crops with the arrival of monsoon rains in June. South West monsoon in India is extremely important, with the season lasting for 4 months, and the fate of Kharif crops hinges on this. Deficient rainfall greatly affects Kharif crops owing to the availability of the water in the reservoirs

Impact on Rabi crops:

The rabi growing season starts after the summer monsoon. The crops are sown in mid-November, and harvesting happens in April/May. These include wheat, oats coriander, carrots, onions, and potatoes. The crops either with the water percolated in the soil during the southwest monsoon or by irrigation. A good monsoon season leads to a bumper farm output that keeps food prices under check. The basket of food products that accounts for 50% of the country’s consumer price index, is key to maintaining a low, and stable inflation, monitored closely by RBI.
Therefore, it is evident that the agricultural production, and by inference the macroeconomic indicators, is most vulnerable to the changing rain patterns.

MONSOONS AND MARKETS—Understanding the bonding

We do see a very powerful correlation between the monsoon, performance of Indian agriculture, its economy and the stock markets, as agriculture that depends on monsoons has the ability to shape the economic growth.
It is an undeniable fact that the rains determine the agricultural output as well as the income of the farmers. It has a dominant impact on the manufacturing, as well as the services sectors. A poor monsoon not only leads to lower production of commodities, food grains and other products but it also deals a crushing blow to the entire economy, thus fuelling inflation. As the weak monsoon impacts the GDP growth of the country, it is dangerous for the economy, and equity markets as well.

Good monsoon positively impacts the Fertilisers and Agrochemical companies. The rural demand for products and the increasing purchasing power also boosts the stock prices.
It is interesting to see the demand for stocks of FMCG companies like HUL, Colgate, ITC, P&G moving up with normal monsoons.
High farm production will also lower raw material costs for companies that make packaged foods, for example, Britannia, Nestle, and GSK.
Favorable monsoon will also be beneficial for firms manufacturing heavy vehicles and tractors, such as Mahindra & Mahindra, John Deere, Escorts, & Bajaj Auto. We cannot ignore the prospering of Fertiliser and Irrigation companies like Chambal Fertilisers, Zuari Agrochemicals, Jain Irrigation as they will get a thrust from the good monsoons. The stock prices of all these companies soar up, and we can see their splendid performance in the stock markets!
But there is something more to it… the monsoons and stock markets have one common thread. They are unpredictable.

A favorable monsoon creates optimism about the economy among the investors, including foreign institutional investors. A robust economic outlook lifts the sentiments of the investors, mainly companies selling products in rural areas from sectors such as FMCG, consumer goods & automobiles.

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