Monsoon rainfall weakens after a healthy start, can it spoil the mood of the market?

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After a healthy beginning, monsoon rains weakened in July, raising concerns that a longer dry spell will increase the inflation pressure significantly.

Meanwhile, consumer price index-based inflation (CPI), or the retail inflation, for the month of June rose 6.26 percent, as food prices hardened further, and transportation costs rose due to higher petrol and diesel prices.

Monsoon rainfall has now been below normal for the past 20 days. Lagging for the second consecutive week, monsoon rainfall dropped 46 percent below the long period average (LPA) during 1-7 July. In the preceding week rainfall was 30 percent below normal.

Cumulative rainfall through July 11 July was 8 percent below the LPA, as the dry spell eliminated the significant surplus seen earlier in the season (more than 40 percent). The progress of monsoon during July-August is critical, as it has a significant bearing on sowing and crop yields for the year, Rahul Bajoria, Chief India Economist, Barclays India, pointed out.

The Indian Meteorological Department (IMD) expects the monsoon to revive during the second week of July and maintains a normal rainfall (96-104 percent LPA) forecast for the month.

A critical factor for the market

Monsson has a significant impact on the Indian economy and the market closely tracks it not only influences inflation but also affects a major part of the demand-supply dynamics of the market.

As per the Economic Survey 2020-21, the contribution of the agriculture sector to the Gross Value Added (GVA) increased to around 20 percent in 2020-21 from about 18 percent in 2019-20.

The South-West monsoon is crucial for the cultivation of Kharif (summer) crops which are heavily dependent on monsoon rainfall as it determines the production of crops.

A healthy monsoon boosts farm production and raises rural income which results in an increased demand for FMCG products, tractors, two-wheelers and consumer goods.

A weaker monsoon not only deteriorates demand but also puts pressure on the government to take measures like farm loan waivers. In extreme cases, the government may have to import foodgrains too.

A weak monsoon is critical for water reservoirs and a significantly weak monsoon may become a policy headwind, experts point out.

"The monsoon season is critical for water reservoir storage levels. Increased use of irrigation systems means reservoir storage levels have become vital for India’s farm output. The reservoir levels are critical for irrigation, power and drinking water supply in the country, and an extended dry spell can become a policy headwind," said Bajoria.

Does the market need to worry?

Even though the monsoon has hit a dry patch, it is too early to say that it is going to be below normal and will hit the economy. So, the market does not need to worry about it at this juncture, experts said.

"While the break in the monsoon over the past few weeks has been a cause for concerns, the pick up in monsoon activity over the past few days has come as a relief. We believe that continued improvement in monsoons activities as per the IMD’s prediction would be positive for the rural economy and the market," said Jyoti Roy - DVP- Equity Strategist, Angel Broking.

However, Roy added that any further break in the monsoon especially in August can have some adverse impact on the market.

Santosh Kumar Singh, Head of Research, Motilal Oswal AMC said that from a very near-term perspective, if the monsoon remains below average it can play a spoilsport, given it can not only drive up inflation but also delay recovery in the rural markets.

However, the market from a longer-term perspective may be looking at the capex cycle picking up, demand in the overall economy increasing as well as the interest rates remaining rangebound, Singh said.

Gaurav Garg, Head of Research at CapitalVia Global Research, believes the ongoing dry spell in the monsoon might affect the overall sentiments of the market.

"There are many sectors that are affected by the monsoon either directly or indirectly. Automobiles, Agriculture stocks which include agrichemical and fertilizers are affected the most.  Some profit-booking is expected in these sectors," said Garg.

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