Monsoon & Share Market: What do above-normal rains mean for the economy? How should investors play the monsoon theme?

Amid all expectations of an above-normal monsoon this year, the rains have disappointed in June.

According to the India Meteorological Department (IMD), despite the forecast of an above-normal monsoon this year, India has received 20 per cent below-normal rainfall in June so far. The northern part of the country continues to reel under a sweltering heat wave even though the rain-bearing monsoon winds reached the Indian mainland two days earlier than usual and advanced into most parts of the south and some parts of the central Bay of Bengal.

However, private weather forecaster Skymet believes the southwest monsoon will gather pace in the coming days and will cover the entire country ahead of its schedule.

Garima Kapoor, Economist, Elara Capital, pointed out that the El Nino conditions that prevailed since June 2023 led to subnormal monsoons in India last year. This year, the chance of La Niña conditions increases to 60 per cent during July-September and 70 per cent during August-November, which should bode well for the monsoon.

"An above-normal monsoon with balanced spatial and intertemporal distribution should augur well for the agriculture and agrochemical sector and rural demand in general," said Kapoor.

Critical for the Indian economy

The monsoon is hugely significant for India, as the southwest monsoon brings nearly 70 per cent of the rain the country needs for the agriculture sector and to refill reservoirs and aquifers.

According to reports, nearly 44 per cent of food production and about 56 per cent of the net cultivated area depend on monsoon rains.

Agriculture contributes about 14 per cent to India's gross domestic product (GDP). It is the mainstay of India's workforce, as about 44 per cent of the country's population depends on it. The importance of monsoon for the country is self-explanatory.

What does an above-normal monsoon mean for the economy?

An above-normal monsoon is good for the economy in general and the rural economy in particular. This means that the Indian agriculture sector will see abundant production, inflationary pressure will ease, and rural income and consumption will get a boost, which will give a fillip to the overall economy.

G. Chokkalingam, the founder and head of research at Equinomics Research Private Ltd, pointed out that this year's normal monsoon is more critical. The last monsoon ended with a 6 per cent shortfall, followed by a record level of heat due to which water storage in major reservoirs has fallen quite badly this year.

"The current crop year (ending in June) will likely see stagnating or marginal falls in food grain output. Thus, a normal monsoon this year is critical. Otherwise, the agricultural sector's GDP growth will be affected quite significantly. Also, core inflation can firm up strongly, impacting the overall economy and markets," said Chokkalingam.

Amit Goel, the co-founder and chief global strategist at Pace 360, underscored that a good monsoon improves agricultural output, leading to higher disposable income and spending power. This could potentially increase sales of two-wheelers and tractors, which are crucial for the rural market.

Goel pointed out that it also boosts the demand for consumer goods in rural areas. Investors may consider FMCG companies with a strong rural presence. A healthy monsoon season boosts crop production, increasing the demand for fertilisers and benefitting fertiliser companies from this increased demand.

Sunil Damania, chief investment officer at MojoPMS, said a good monsoon has direct and indirect benefits, including improved rural income, which boosts demand for goods and services.

"Adequate rainfall helps control food inflation, reducing the need for export bans on agricultural products and supporting forex earnings. It also decreases power demand while increasing hydropower generation," said Damania.

How should investors play the monsoon theme?

Most experts advise focusing on rural themes and agri-sector-related themes, as these sectors get a boost from monsoon rainfalls.

"Good monsoon will boost agricultural/rural incomes and stimulate demand for segments like fertiliser, agrochemicals, tractors, two-wheelers and FMCG. Fertiliser stocks have already started responding positively to expectations. Investors can realign their portfolios in favour of these rural themes," said VK Vijayakumar, chief investment strategist at Geojit FinancialServices.

Kapoor of Elara Capital said the immediate beneficiaries of the above-normal monsoon will be agrochemical and fertiliser players whose demand will remain supported.

A good crop amid supportive pricing should also bode well for agriculture earnings. However, Kapoor said the evidence of an above-normal monsoon being positive for consumer-oriented stocks is limited.

For instance, while the trend for FMCG is positive, the impact on sector returns is not found to be substantive.

"A good monsoon, hence a healthy Kharif crop, aligned with a higher number of auspicious days for weddings in the second half of the year 2024 and a possible higher social spending in the budget should bode well for consumer-oriented sectors," Kapoor pointed out.

Chokkalingam said a good monsoon will boost agricultural and rural incomes and thereby stimulate demand for segments like fertiliser, agrochemicals, tractors, two-wheelers, and FMCG.

"Fertiliser stocks have already started responding positively to expectations. Investors can realign their portfolios in favour of these rural themes. It is better to wait for the first two months of the monsoon season to assess actual rainfall progress. If it turns out to be above normal, investors will look at agri-input stocks," said Chokkalingam.

Damania of MojoPMS believes investors can leverage the benefits of a good monsoon through themes like two-wheelers, tractors, cement, agrochemicals and fertilisers, banks and NBFCs, Hydropower companies, andFMCGs.

Goel of Pace 360 believes the government might invest more in rural infrastructure projects due to a positive monsoon outlook.

"Investors can explore companies involved in rural electrification, irrigation, or roads. Government policy initiatives and spending plans in rural areas can significantly impact these sectors. Global commodity prices of agricultural products can affect the profit margins of companies in these sectors," said Goel.

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