Monsoon aspect and stock market

August 17, 2012

Failure of monsoon is one cliché headline I have been noticing for the past 1 month. It is a cause of concern since most of India’s agricultural territory is rain fed. Except for few places like Punjab, Haryana ,etc rest of India has a paucity of Irrigation system. Thus if rains have bottomed out, it will have direct impact on agriculture trickling down to higher inflation.

One should note that only 15-20% of GDP comes from agriculture but about two thirds of Indian population which stays in rural India relies on it for its bread and butter. June IIP data which entered the negative territory might plummet more if monsoon doesn’t get better. This is because low rainfall will lead to lower yield and higher prices. Though we have about 90-100 MMT storage capacity which can contain inflation, poor monsoon will have a sentimental impact on the stock market which has already been underperforming its previous years. Due to low rainfall the out-performing FMCG companies also will a negative impact and even the two wheeler motor industry since most of its customers are from rural India, and a gloomy output in agriculture will be bad for the industry. The badly hit states have been Gujarat, Maharashtra and Karnataka. This will significantly impact the cotton industry.

Graph shows huge variation over the years.

On a larger note there is a need to develop at least the irrigation infrastructure as soon as possible and even replace the obsolete methods used by IMD so that the farmer and investor can expect during the monsoons. Looking at the flip side poor monsoon is good for companies into cement and construction as monsoon is always a hindrance to them. So it seems to be a good idea to take beaten down stocks from infra space in this season after circumventing on a bottom up approach. Even though rupee has deteriorated steps must be taken to increase imports wherever necessary.

Editor: Pakshaal S.Shah

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