Since inflation and interest rates are linked, the effects of a good monsoon season will have an impact on agricultural incomes, the overall market sentiment, and even policy action.
The three days that the equity market was open for trading in the previous week, S&P BSE Sensex went up 837 points. This cheer was on account of, among other things, a favourable monsoon forecast for the year. On 11 April, the government said that the El Nino condition is declining, and that La Nina effect is likely to takeover leading to a good monsoon. On 13 April, Sensex closed at its highest levels in nearly three-and-a-half months at the same time the India Meteorological Department (IMD) forecasted an above-normal monsoon. Stocks of agri-input and agri-equipment companies and those that depend on the rural economy for revenues (such as two-wheelers), saw an increase in share prices.
MONSOON AND THE AGRICULTURE SECTOR
El Nino is usually associated with scarce rainfall or even a shift in the monsoon season, i.e., late rains or a withdrawal. La Nina, on the other hand, usually has the opposite impact, and brings more rainfall.
The progress of monsoons is a key driver for the agriculture industry. A recent Kotak Institutional Equities report stated that the monsoons have been playing a bigger role, especially since financial year 2013, in the absence of high growth in the minimum support price (MSP) of key crops.
As per the Economic Survey 2015-16, 25 crops are covered by MSP. This is the minimum price that the government assures farmers for their produce in case of a steep fall in market prices. The government announces prices at the beginning of the sowing season. Due to failed rains in the past two years, MSPs have only risen marginally.
According to the Economic Survey, the agriculture sector employs 48.9% of the workforce, and its share in gross domestic product (GDP) was 17.4% in 2014-15. However, the growth in agriculture GDP and its allied sectors saw a fall of 0.2% during 2014-15. So, a good monsoon this year could translate into increased agricultural productivity and possibly an increase in MSPs.
IMPACT ON YOU
MSPs play a key role in driving cereal inflation, and also affects prices of other agricultural products (read more herehttp://bit.ly/1myXflv). Since inflation and interest rates are linked, the effects of a good monsoon season will have an impact on agricultural incomes, the overall market sentiment, and even policy action.
Do keep in mind that these are early days, and the monsoons are about two months away. IMD will release its final forecast in June-July. But if the rains are indeed good, agricultural GDP can see an increase, as will rural income and consumption. This will benefit stocks of companies in sectors such as fast-moving consumer goods (FMCG), agri-inputs, and even rate sensitives sectors such as auto and banking.
Good rains also bode well for borrowers. Reserve Bank of India (RBI) governor, Raghuram Rajan, has said that there will be room for cut in policy rates if inflation continues to ease and the monsoon is in line with the forecast. In 2015, RBI had cut rates by a total of 125 basis points, and on 5 April this year, it cut the repo rate by 25 basis points. One basis point is one-hundredth of a percentage point.