Below normal or reduced rainfall is something which does not auger well for the economy because it will lead to a rise in inflation and earnings of India Inc. as well, suggest experts.
D-Street took a sigh of relief last week when the Indian Meteorological Department (IMD), in its first-stage forecast, predicted ‘near normal’ South-West monsoon (June-September 2019).
IMD’s forecast was in contrast with that of Skymet, which had predicted a ‘below normal’ monsoon season, citing El Nino risks. Quantitatively, Skymet pegged rainfall activity at ~93 percent of long period average (LPA) against IMD's prediction of 96 percent of the LPA.
IMD expects weak El Nino conditions to prevail during later part of the season, but with reduced intensity. EL Nino conditions are often associated with a weak rainfall in India.
Below normal or reduced rainfall is something that does not augur well for the economy because it leads to a rise in inflation and affects earnings of India Inc. as well, say experts.
If the monsoon remains on track, it would put more disposable income in the hands of farmers that would, in turn, increase demand for autos, consumption sector, housing, etc., suggest experts.
“In a normal monsoon situation expect pipes, automobile, select NBFCs, consumer durables and select consumer staple stocks to do well,” Rusmik Oza, Head of Fundamental Research, Kotak Securities told Moneycontrol.
IMD’s second-stage forecast will come in June 2019 which will be more critical, suggest experts.
Assuming monsoon rains to be normal, DK Aggarwal, Chairman & Managing Director of SMC Investments & Advisor has picked five stocks that are likely to benefit the most. They include ICICI Bank, ITC, HCL Tech, LIC Housing Finance, and Tech Mahindra.
IMD has been wrong before
The IMD recently has pegged overall countrywide rainfall at 96 percent of the LPA with a model error of +/-5 percent. However, data shows that in most of the last 11 years, the IMD has been off marks.
“Any material variance in the monsoon outcome in terms of spatial distribution will have a direct impact on the agricultural output and a cascading effect on the overall economy, impacting consumer spending,” said Aggarwal.
“The monsoon rains have a direct relation with the inflation rate and hence to the monetary policy. A plentiful monsoon creates a positive perception about the economy among investors, be it domestic or global and keeps the mood buoyant,” he said.
Quantitatively, IMD has overestimated the monsoon outcome over the past five years. The first estimate for southwest monsoon in FY19 was at 97 percent of LPA. By end of the season (June-September), the monsoon was around 91 percent of LPA.
“Drawing implications for growth or prices from monsoon forecasts will be premature with these initial forecasts. However, if the monsoon were to be subnormal, it is not for certain that farm production will fall,” explains Oza of Kotak Securities.
“Yields have improved over the past few years despite below-normal monsoon. However, the agriculture sector could certainly do with some price increase. In the last two years even though monsoon was subnormal the production increased across major food items,” he said.
Experts feel that more than production, low prices have been one of the primary causes of farm distress. “Even if the monsoon turns out to be subnormal in FY20, its impact may be curtailed on the rural economy due to various rural programs carried out by the government,” said Oza.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.