What does a bad monsoon mean for India’s stock market?

While individual stocks might be affected, the index is largely unaffected in monsoon-deficient years.

This monsoon, India has witnessed its driest August in the last 122 years. Due to the rainfall deficit, this year’s monsoon has dipped 9 per cent below the long-term average in August, which is the poorest performance in eight years. The deficiency meant that farming in a lot of areas came to a halt, and reservoir water levels remained below their 10-year normal. In 25 states, rainfall was categorised as normal, while it was inadequate in seven states with Gujarat, Kerala, and Rajasthan being the worst hit.

The economy’s dependence on agriculture is much less compared to what it was a few decades back, but it still contributes around 20 per cent to the nation’s Gross Domestic Product (GDP) and employs around 45 per cent of the country’s employed labour force. The monsoon is closely related to the agriculture sector's and rural India’s prosperity. A favourable monsoon increases agricultural output, which, in turn, boosts rural earnings and increases rural demand for products and services. On the other hand, a poor monsoon might impede agricultural activity and diminish demand for goods such as rural homes, tractors, and FMCG products. This would force the government to implement programmes like farm loan waivers, and spend on importing food to fill the deficit in production. The cascading effect of a poor monsoon has a bearing on a very high number of sectors.

Last month there was a new report on a probable ban on the export of sugar considering low crop yields due to a poor monsoon. This is expected to send the sugar prices north as fears of domestic fulfilment increase. Apart from this, all summer crops like soybean, millet, and pulses could see their prices rise in the coming weeks. The monsoon deficiency has exacerbated the battle against inflation in India which seemed to close the gap with the Reserve Bank of India’s tolerance limit. As per the latest Consumer Price Index (CPI) numbers, the index rose to a 15-month high of 7.44 per cent in July while the RBI target is 4 per cent.

Reports from industries that are dependent on rural areas, such as the automobile industry, have raised concern about a lack of rainfall stifling a rise in rural demand. The rural areas account for over 50 per cent of two-wheeler sales, about 40 per cent of passenger car sales, and 100 per cent of tractor sales. The FMCG industry too could be substantially affected by deficient monsoons. For example, Parle Products, which is one of India’s largest biscuit-making companies, sells 40 per cent of its total volume in rural areas.

Deficient monsoon-stock markets

When we look at how the stock markets have performed in years of deficient monsoons in the last 20 years, we notice that the broader indices have been largely unaffected.

One of the reasons for this de-coupling could be the fact that there are a lot of factors that could have a bearing on the performances of equities in each period. For example, in 2009, the equity market and global economies were recovering from the 2008 financial crisis resulting in a period of good returns for the index.

If the results of the companies in Q1 of FY24 are anything to go by, the prices of raw materials are in a cooling phase after being at elevated levels in FY23. The commentaries of central banks around the world suggest that we might be at the end of the interest rate hike cycle. The GDP growth numbers of the Indian economy in Q1 came in at 8.3 per cent which was stronger than the RBI’s estimates of 7.8-8 per cent. Hence, while deficient monsoon poses a challenge, there are these factors that bode well for the economy at the current stage.

How to prepare?

Diversification is one of the most important strategies that a long-term investor must employ to manage their risk. This diversification should not only be in the form of exposure to multiple industries within one’s equity portfolio, but also in the form of exposure to varied asset classes according to one’s risk appetite and investment goals. Earlier in the article we saw how the index has been largely unaffected in monsoon-deficient years. The broader index of Nifty or Sensex is the best example of a diversified sector exposure.

Lastly, maintaining a longer-term perspective helps negate some of the temporary uncertainties and allows investors the time needed to weather short-term market volatility like the deficiency of monsoon. This approach promotes patience, rational decision-making, and helps focus on the underlying fundamentals of investment.

(Parimal Ade (Twitter: @AdeParimal) is Founder, and Gaurav Jain (Twitter: @gaurav28jain) is Co-Founder, Investyadnya.in)

Disclaimer: The views expressed above are the authors' own. They do not necessarily reflect the views of DH.