Amid expectations of an above-normal monsoon this year, the rainfall in June has been disappointing.
According to the India Meteorological Department (IMD), India has so far received 20 percent less rainfall than normal in June, despite forecasts of an above-normal monsoon this year. Although the rain-bearing monsoon reached the Indian mainland two days earlier than usual and advanced to most of the south and parts of the central Bay of Bengal, the northern part of the country continues to reel under the heat wave.
However, private weather forecaster Skymet believes that the southwest monsoon will accelerate in the coming days and cover the entire country ahead of its schedule.
Karima Kapoor, economist at Elara Capital, pointed out that El Nino conditions prevailing since June 2023 led to abnormal monsoons in India last year. This year, the chance of La Niña conditions increases to 60 percent in July-September and 70 percent in August-November, which bodes well for the monsoon.
„A higher than normal monsoon with balanced spatial and temporal distribution will bode well for the agriculture and agrochemical sector and rural demand in general,” Kapoor said.
Important for the Indian economy
Monsoon is of great importance to India as the Southwest Monsoon brings nearly 70 percent of the rainfall the country needs for the agriculture sector and for filling reservoirs and aquifers.
According to reports, nearly 44 percent of food production and 56 percent of net cultivated area depend on monsoon rains.
Agriculture contributes about 14 percent to India’s Gross Domestic Product (GDP). It is a major source of India’s labor force as about 44 percent of the country’s population relies on it. The importance of monsoon to the country is self-explanatory.
What does an above-normal monsoon mean for the economy?
A higher than normal monsoon is good for the economy in general and the rural economy in particular. This means that the Indian agricultural sector will see higher production, inflationary pressures will ease, and rural incomes and consumption will be boosted, which will complement the overall economy.
G. Chokkalingam, founder and head of research, Equinomics Research Private Ltd, pointed out that regular monsoons have been crucial this year. Last monsoon ended with a 6 per cent deficit, followed by record heatwaves, and water storage in major reservoirs has fallen badly this year.
„The current crop year (ending June) will see stagnation or a slight decline in food grain production. Hence, regular monsoon is crucial this year. Otherwise, the GDP growth of the agriculture sector will be significantly affected. Also, core inflation may occur. Strong certainty, impact on the overall economy and markets. causes,” Chokkalingam said.
Amit Goel, co-founder and chief global strategist, Base 360, underlined that a good monsoon boosts agricultural production, leading to higher disposable income and spending power. This is likely to increase the sales of two-wheelers and tractors, which are important for the rural market.
It also increases demand for consumer goods in rural areas, Goyal pointed out. Investors can consider FMCG companies with strong rural presence. A healthy monsoon increases crop production, increases the demand for fertilizers and the fertilizer companies benefit from this increased demand.
Sunil Damania, Chief Investment Officer, MojoPMS, said a good monsoon has both direct and indirect benefits, including improved rural incomes and increased demand for goods and services.
„Adequate rainfall helps curb food inflation, reduces the need for export restrictions on agricultural products and supports foreign exchange earnings. It also reduces power demand while increasing hydropower generation,” Damania said.
How should investors play the monsoon theme?
Most experts advise to focus on rural themes and agricultural sector themes as these sectors get a boost from the monsoons.
„A good monsoon will boost farm/rural incomes and spur demand for segments like fertilizer, agrochemicals, tractors, two-wheelers and FMCG. Fertilizer stocks have already started responding favorably to expectations. Investors can rebalance their portfolios in favor of these rural themes.” VK Vijayakumar, Chief Investment Strategist, Geojith Financial Services said.
Elara Capital’s Kapoor said demand would be supported by agrochemical and fertilizer manufacturers, the immediate beneficiaries of the aforementioned regular monsoon.
Good yield with support pricing will also be good for farm income. However, Kapoor said there was little evidence that an above-normal monsoon would be positive for consumer-oriented stocks.
For example, while the trend for FMCG is positive, the impact on sector income is not significant.
„A good monsoon, hence a healthy kharif crop, aligned with a higher number of good days for marriages in the second half of 2024 and higher social spending in the budget augurs well for consumer-oriented sectors,” Kapoor pointed out. out.
Chokkalingam said a good monsoon would boost agriculture and rural incomes, thereby spurring demand for segments like fertilizer, agrochemicals, tractors, two-wheelers and FMCG.
„Fertilizer stocks have already started responding favorably to expectations. Investors can restructure their portfolios in favor of these rural themes. It is better to wait for the first two months of monsoon to assess the progress of actual rains. If it is high, normally, investors will look at agro-input stocks,” Chokkalingam said.
Damania of MojoPMS believes investors can reap the benefits of a good monsoon through themes like two-wheelers, tractors, cement, agrochemicals and fertilizers, banks and NBFCs, hydropower companies and FMCGs.
Goyal of Base 360 believes that the government may invest more in rural infrastructure projects due to the favorable monsoon outlook.
„Investors can explore companies involved in rural electrification, irrigation or roads. Government policy initiatives and spending plans in rural areas can significantly affect these sectors. Global commodity prices of agricultural commodities can affect the profit margins of companies in these sectors,” Goyal said. .
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Disclaimer: The above views and recommendations are the opinions of individual analysts, experts and brokerage firms and not mint. We advise investors to consult certified professionals before making investment decisions.
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