How monsoon will impact your investments- Business News
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How monsoon will impact your investments

A good monsoon means more disposable income in the hands of farmers which leads to gold investments

 Jinsy Mathew   
  • May 16, 2016  
  • |  
  • UPDATED   13:47 IST

For the first time, after many years, both the India Meteorological Department (IMD) and private forecaster Skymet predicted 'above normal' monsoon. This forecast came as a huge relief and a sentiment booster for market participants as India has been reeling under the effects of two years of back-to-back drought like conditions. However, one also has to take into consideration the fact that equity markets which are currently jubilant about monsoon can quickly turn sour at the first signs of this prediction going awry. Other than equity, monsoon tends to have significant bearing on gold and economy too.

Monsoon & India growth story

To start with, monsoon rains are crucial for agriculture output as over 55% of arable land is rain-fed. When it comes to food production, 44% of total produce is depended on June-September southwest monsoon. In terms of GDP, farm sector accounts for about 15% and over 58% of households depend on agriculture as their primary means of livelihood.

Given the huge reliance on agriculture as a source of income, adequate rain means bumper harvest of soyabean, corn, cane, cotton and rice. It is generally seen that a good harvest coupled with decent selling price ensures that farmers become cash rich thereby boosting the rural demand which in turns spurs economic growth. Anubhuti Sahay, Head, South Asia Economic Research (India) in its latest economy report observed that good rains have the potential to boost agricultural-sector growth to 4-5% in FY17 from 1% in FY16, thereby contributing 40-50bps to headline GDP growth. On the other hand, inadequate rain could shave 30-50bps from FY17 growth forecast.

Impact on Stock Market

As predicted, if the monsoon is normal or above normal, revival in rural demand is expected. This in turn translates to larger spend on consumer durables, two wheelers etc. As a result, companies operating in the above mentioned sectors along with those industries providing raw materials for the manufacturing of these goods stand to gain.

Given that equity market is forward looking in nature and tends to discount the future based on what it seen in the present, the reaction of equity market which soared nearly 2% post IMD's prediction, was no surprise.  Each of the companies which have exposure to rural segment galloped on hopes of better sales which in turn would translate to better earnings in quarters ahead.

Dipen Shah, Sr. VP-Private Client Group Research of Kotak Securities is of the view, "As on date, India remains expensive vis-a- vis its peers in other emerging markets. However, if monsoon is good and government is able to push reforms, then from FY17 perspective, India's valuation will be in-line." On the other hand, incase after initial showers, if monsoon fizzles out then there is a grave danger of a sizeable correction. The 200 point rally seen in the Nifty since mid of April was on the basis of favorable monsoon and better-than-expected fourth quarter earnings.

Mayuresh Joshi, Fund Manager (PMS), Angel Broking notes, " Any negative news on monsoon will be a huge sentiment negative as companies with rural exposure will come under stress, once again, due to tepid volumes." He adds, currently the market is betting big on revival in rural demand and hopes that Government will be able to bring in the much needed reforms. But looking at the brighter side of the fall, Nomura in its report noted, "Any fall in the market on monsoon concerns would be, therefore, a buying opportunity."

Some of the sectors that gains from bountiful monsoon are companies that are into packaged foods, two wheeler, and tractor manufactures, consumer durables and fertilizers.

Rate cut expectation

Reserve Bank of India Governor Raghuram Rajan has on several occasions iterated that future rate cuts will depend on good monsoon and lower inflation. In an interview to The Wall Street Journal Rajan had said," We're looking at inflation. If it continues on a downward path, that would create room (for rate cut)."

According to ratings company CRISIL, a normal monsoon is likely to ensure that food inflation remains under control thereby ensuring consumer price index based inflation to average around 5% this fiscal. This means incase if monsoon is on expected lines and there is no further storm clouds gathering in international market, the door to another 25 bps rate cut is very much open. In its last Policy, RBI had eased repo rate by 25 basis points to its lowest in more than five years.   

Impact on Gold

"Historically, it has been observed that there is a decent co-relation between gold consumption and monsoon. A good monsoon means more disposable income in the hands of farmers which leads to gold investments," says CP Krishnan, Whole Time Director, Geofin Comtrade. In India, two-thirds of the gold demand comes from rural areas. For villagers, gold is the ultimate store of value and purchases made are mostly in the form of jewellery. In a recent news report, World Gold Council too alluded to this relation when it stated that demand for yellow metal could rise by as much as 10% in 2016, in case of a good monsoon.

When it comes to prices, much depends on how gold decides to move in international markets. Currently, gold is struggling in a narrow range given the possibility of a rate hike in upcoming US Fed meeting (to be held in June). Krishnan is of the view that gold will move into a bullish stance, if it sustain above $1,300 mark. On the hand, if the price caves in below $1,280, then a deep fall by another $50-$60 can be anticipated.