Introduction
The yearly volume and duration of monsoon in India have hardly been consistent. This irregularity has a large impact on India’s agro-based economy. But what about Indian stock markets? Are they really affected by the mood of the monsoon? Let’s find out.
The Correlation
The study done by Hardik Vachhrajani, Dr.Jay Desai and Kinjal Jay Desai establishes a significant relationship between rainfall and performance of Indian equities. They found that the post-monsoon periods have generated almost double the return than the pre-monsoon periods.
Except some irrigated pockets, 65% of Indian agricultural land is rain-fed. Irregular and inadequate rainfall affects the agricultural production massively. The inevitable consequence is agro-inflation and subsequent price rise of some agro-based manufacturing items.
Such situation also brings the farmers to an economic distress situation cutting their purchasing power to a great extent. If the general inflation rises alongside, public spending, investment and the foreign exchange reserve are badly affected. In short, a poor rainfall has a spiral effect on the entire market since 70% of our economy, directly or indirectly, is agriculture dependent.
Naturally, the stock markets are going to show their reactions. Investors look forward to the news from the Indian Meteorological Department (IMD). If the prediction is not favorable, the stocks, particularly of companies having a large rural customer base, perform badly.
We all know that RBI is inflation-obsessed. High inflation means no rate cuts in near future and consequently no incentive to invest. Growth suffers and so do the equities.
2016 Forecast
After two consecutive drought years, this year, India should see a good monsoon. J V Kulkarni, a retired meteorologist of Indian Institute of Tropical Meteorology (IITM), believes that La Nina should bring a better rainfall this year.
If this is the case, Raghuram Rajan may think of cutting the interest rates towards the end of 2016. There is always a positive sentiment associated with rate cuts. Based on the prediction, then this is the golden time for investors and traders to buy stocks.
Word of Caution
In the past, on multiple occasions, IMD’s predictions and actual rainfall estimates had significant deviations.
Exception
However, if we consider the last decade, it is hard to find any strong correlation between monsoon and stock market performances. On the basis of the long-term average, The BSE Sensex shows the highest returns in the worst monsoon years. Even Nifty has generated positive returns mainly during the poor rainfall spells.
You got it.
There are definitely other economic and political factors affecting the performance of our stock indices. See the proof.
*Last data collected on 15th May 2015
- Despite the moderate rainfall, there was a huge drop in 2008 due mainly to global economic crisis.
- The positive movement of 2009 was not at all related to monsoon rather to the recovery initiatives from the last fall.
- In 2014, India experienced weak monsoon and heavy drought in most parts of the nation. Still, the stock markets were not much affected, evidently due to the Modi enthusiasm.
Conclusion
In my opinion, not the stock markets rather individual stocks of companies selling mainly in rural India (e.g. Maruti, Bharti Airtel and HDFC) are more vulnerable to monsoon volatility. Definitely, the impact can not be totally denied. However, other developments on the global and national front either amplify or offset the monsoon’s effect on market performance.
