Monsoon and its impact on markets

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Seasonal Shift and its impact on markets and what should investors do?

Rainfall numbers and the probability of a ‘normal’ monsoon is one of the most tracked parameters for the economy and investment analysis. Agriculture is the strength of the Indian economy. Agriculture and allied sectors are one of the largest sectors of the country accounting for 20.19% of India’s gross value (fiscal year 2020-21). Let’s look at how monsoons can affect your investment portfolio.

Monsoons in India and Predictions for the Year: The southwest monsoon is primary the monsoon season in India starting from June to September. This season fulfils the crucial 75% of the total water requirement and provides for the farming of both, the Kharif and the Rabi crops. Kharif cropping season is from July to October whereas the Rabi cropping season is from October to March. Southwest monsoons not only have a direct impact on kharif crops but also aid in replenishing water sources like the reservoirs, lakes and groundwater which are further used for irrigation of Rabi crops.

The Indian Meteorological Department (IMD) has predicted normal monsoon for this year. However, the spatial distribution suggests that the key agricultural region of the Northwest will likely have drier weather and the rainfall during the starting of the season could be low.

How do monsoons impact portfolios? Inflation: Rain has a direct impact on agricultural produce. Rain can affect the yields of crops such as rice, soybean, corn, sugar cane, and oil seeds, leading to an impact on food inflation. Raw Material Prices: Cereals, pulses and crops are often raw materials for various industries. An impact on agricultural produce will impact raw material prices. Rural Demand and sentiments: Monsoons often have a direct impact on rural demand and sentiments, thereby affecting the stock price of companies and sectors which are dependent on rural consumption. Sec- tors likely to be impacted by monsoon could be FMCG, auto – tractors and two wheelers, fertilizers, and pesticides.

What should investors do? With monsoon showers in Mumbai, the weather has turned a little better. While the monsoon remains import- ant for the agri-economy and market sentiment, its impact on the overall economy has decreased significantly over the years.

Stock market movements are seldom determined by a single factor. As such, on a given day, there are a multitude of factors, including FII flows, interest rates, corporate results, geopolitics, the monsoon, etc. Instead of trying to forecast and then reacting to each of these factors, investors will do well to have a well-defined financial plan and stick to it. To help with your financial plan, consult a financial advisor.

The author is CEO, Baroda BNP Paribas Mutual Fund, Views are personal