Monsoons are below normal in India as of June 2014 and there are concerns on the effect of weak monsoons on markets. The concerns are well founded as lack of rain hurts rural consumption as crop production is down. Inflation too is affected as prices of food articles rise.
Monsoons are definitely a concern for the economy and for markets as a whole but usually the concerns remain more on paper rather than on actual performance. For example, in the years 2002, 2004 and 2009 when India faced drought, the Sensex and Nifty were largely strong performers. Equity markets moved up on factors like pick up in global economic growth and election (2004 and 2009) rather than on Monsoons.
In the current year, India has seen a strong mandate given to the Prime Minister Narendra Modi and expectations are that he will take the right decisions for the economy. India has seen a period of low growth and high inflation with GDP growth down from over 8% levels to below 5% levels over the last few years and CPI (Consumer Price Index) inflation ruling at around 9.5% levels. This trend is expected to change with the policies of the new government.
Globally, the world is limping back to normal post a period of recessionary like conditions since the 2008 financial crisis. Central banks from the Fed and ECB to Bank of Japan are maintaining loose monetary polciies and are keeping liquidity cheap in the system. An improvement in global growth coupled with cheap liquidity will drive flows into Indian equities.
RBI is keen on containing inflation and has set a target of 8% and 6% for the CPI by end of fiscal year 2014-2015 and 2015-2016 respectively. The government is looking to keep down prices of foodgrains given that it has enough buffer stocks and if distribution can be streamlined, food prices are unlikely to flare up. India produced record 263 million tonnes of foodgrains in fiscal 2013-14.
Agriculture accounts for around 14% of GDP and even with poor or no growth, the economy can grow at a good pace on the back of services and industry that have weights of around 60% and 26% respectively.
Hence Monsoons failure is not likely to impact equity markets negatively if other domestic and global factors are positive.
The rainfall deficit is observed to be 37% below normal for the month of June 2014 as the monsoon has been weak throughout India. Drought like conditions are intensifying as water is required intensely for crops sown in the beginning of the kharif season.
The kharif crops include oilseeds, pulses and rice. The Kharif crops are better known as the monsoon crops in the Indian sub-continent. Kharif crops are usually sown with the beginning of the first rains towards the end of May in the state of Kerala during the advent of south-west monsoon season.
As the Monsoon rains advance towards north India the sowing dates accordingly vary and it is done in July in North Indian states. These crops are totally dependent on the quantity of rain water as well its timing. Too much or too little or at a wrong time may adversely affect the crop output.
The El-Nino effect has had some impact but if it escalates from the current scenario monsoon would be significantly below normal in this season.