Maverick Monsoons: Is monsoon in India becoming unpredictable?
Aditya Birla Sun Life Mutual Fund (ABSLMF)
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In India, to a great extent, the first half of a financial year sets the tone of business sentiment across sectors. Data shared by government and private sector companies in the first half of a fiscal reveals a great deal about the direction in which the economy may head. Among the key variables, the data about monsoon is paramount. It elicits considerable amount of attention of analysts, economists and policy-makers. In fact, in the past few months, the data about monsoon has been grabbing headlines. A key reason for this is the far-reaching effect of a good or bad monsoon in terms of its connection with the economy and overall sentiment in the markets. Let us look at these aspects in a nuanced manner:
Vital to the Economy
India’s agriculture sector is highly dependent on monsoons. The Southwest Monsoon (SWM) which falls between June and September in a year provides much-needed water to a fairly large unirrigated land in India. The Southwest Monsoon provides the major portion of India's annual rain. According to a report by The Reserve Bank of India (RBI), “Around 75 per cent of India’s annual rainfall is concentrated during the four months of the SWM season, which is vital for the agricultural output during the kharif cropping season, as almost half of the country’s net sown area is still unirrigated.” Kharif crops include rice, groundnut, maize, soybean, tur, masoor and cotton. This means that inadequate monsoon impacts the production of key foodgrain items. According to a Nomura report titled India Consumer, over 65% of Indian agricultural lands are dependent on the monsoons for the cultivation of kharif crops. Hence, a fall or jump in food production has a bearing on food prices, which in turn has a bearing on inflation. If food production falls, food prices go up. This could result in high inflation which can hurt the economy. The converse of this situation is also true.
Besides this, it is vitally important to understand the correlation between equities and a good monsoon. A good monsoon ensures that prices of key raw materials such as cotton, natural rubber, sugarcane and vegetable oils are not prohibitively high. As a result of this, companies do not incur high expenses due to high raw material prices. This ensures that they pass on the benefit of low raw material prices by pricing goods in an attractively competitive price range. This boosts demand for consumer goods and services, which cumulatively boost the economy. As the economy grows, companies listed on the stock markets benefit as their earnings grow. This serves as a good trigger to invest in the markets.
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