When we think about monsoon and Indian stock markets the very first thought strike us is about agriculture and rural demand.
As 70% approx population still lives in rural area of India, monsoon is still an important factor for our agricultural sector. The first impact of bad monsoon is on food inflation. Which in turn will impact our growth and then our stock markets. Our current inflation rate is near 8 – 8.5% (Wholesale Price Index). Indian Metrological Department has projected the rainfall in June to September to be below normal. Overall, there is a 40 per cent chance of rain being below normal, a 34 per cent chance of a normal monsoon, a 25-per cent chance of a drought and a one-per cent chance of rain being above normal. There is the news that El-Nino a weather phenomena which increases sea surface temperature by 0.5 degree to the above normal temperature causes problems for monsoon.
But we need to check certain facts and history. In past it is observed that even after late start of monsoon it has picked up subsequently later. Our agriculture production is contributed by Kharif( summer) and Rabi (winter) crops equally. The contribution of agriculture towards our GDP has fallen considerably over the years.
Effect of monsoon on Indian Stock Market
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The Love-Hate Affair
2001- The year which saw below normal rainfall and markets fell around 19%.
2002- A year of drought condition and markets fell around 8 %.
2004- Again a drought and markets lost around 14%.
2008 – A year of normal rainfall but the market saw a biggest fall.
2009- The year of worst drought but markets gain around 17%.
Its not only the monsoons!
By analyzing above facts we can see that monsoon plays an important role for the movement of our stock markets. But a close look at it also shows that the markets are influenced by other factors than monsoon. These are economic, political scenario of our country and international factors. As we can see 2008 was a biggest fall in markets which were due to global financial meltdown. The year 2009 has seen an upward movement in market due to a pull back of previous fall. Again in 2001 the fall in markets was contributed by 9/11 attack. It made markets to tumble around 13% in a month of September.
So we can say that though there is no direct relationship between monsoon and our stock markets. But yes it affects our stock markets to great extend.
Currently we are watching markets making new highs on the expectation of better policy reforms by the new government. Huge funds coming from developed countries as the Quantitative Easing (Bond buying programme) going on. These funds are coming in form of Foreign Institutional Investors.According to the Securities and Exchange Board of India (Sebi), FIIs have invested $10.34 billion (Rs 62,053 crore) so far this year.
The Stocks in Focus
The stocks to be watched this monsoon could be which are affected by rural demand like Mahindra and Mahindra, Maruti. Bharti Airtel who has majority of rural subscribers, ITC which is making it strong presence in rural area for its Cigarettes as a substitute for Biddies. HDFC which is focusing on its rural marketing and increasing its business to great extent in rural areas.
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The 3rd Person
Markets are looking very bright with FII’s inflow. But one should not forget that developed countries like USA are curtailing there bond buying programme in a phase manner. Which can result into profit booking and pull the markets down. Also Iraq’s Crisis which is making crude prices unstable is a concern. On National front failure of government to curtail inflation. Even though assurance is given that there is enough food grains to combat the low rainfall .
So we can say to some extent that the stock market loves the monsoon, while the Monsoon at times chooses to ignore the Market! So its more of an Affair rather than a committed relationship.