Will Rain Gods inspire the Stock Market this year?

Monsoon has arrived. According to news reports, the Southern belt of the country has recorded higher than average levels of rains in the first week of monsoon. This could cheer certain sector stocks, which are currently reeling under the pressure of weak rupee, poor FII inflows and rising deficit.

June marks a very important month for the stock market. It gives an inkling on the future trend of the monsoon.

Monsoon and Market Saga

The co-relation between monsoon and the stock market may have weakened over the years as there are other national and global factors, which the stock prices.

However, India continues to be an agrarian economy and almost 60% of the farmland are rain fed. Hence good monsoon is a pre-requisite to the economy growth, which in turn impacts the stock market.

Hence it is always prudent to keep an eye on certain monsoon sensitive sector stocks.

Fertilisers:
A good monsoon is good news for fertiliser stocks. The rationale is demand for agricultural inputs including fertilisers rises when the farmers are cash rich. Their income is directly dependent on good crop output, which is a function of good rains.

FMCG
FMCG sales are primarily by consumption of rural India.
The purchasing power of rural India is directly linked to good agricultural income and monsoon. Hence normal monsoon can improve the purchasing power of rural India, which helps FMCG companies clock in higher sales figures.

Cement
Cement stocks have already started falling in the range of 1-2% on arrival of early monsoon. A good monsoon has a negative impact on Cement stocks
Traditionally cement despatches decline in June-September period because of a slow down in the construction activity during these months.

Auto
The FMCG-monsoon co-relation can be extended to auto sales as well. Poor monsoon means a further dip in the lacklustre auto market.

Almost 50% of the two-wheeler demand comes from Rural India. Secondly, if the farm out put falls because of deficient monsoon, the farmers will not invest on agriculture related equipments such as Tractors. Auto sector has already seen a sluggish period with flat sales reeling under the pressure of high fuel prices and interest rates

Beyond Stocks
Apart from a direct impact on certain stocks, a bad monsoon can play a spoilsport in several other ways. If the farm output declines on the back of a poor monsoon, it triggers inflationary pressures. This means higher input costs for companies and lower margins. From your perspective, higher inflation means a higher cost of living. This also limits the Reserve Bank of India’s (RBI) scope to lower interest rates, which will keep your EMIs constant. Needless to say, if RBI maintains a status quo on interest rates, it will drag down rate sensitive sector stocks such as banking, auto and real estate.