Too early for equity investors to fret about a weak monsoon season

10 Jun , 2022 By : Kanchan Joshi

The Indian Metrological Department (IMD) has forecast a normal monsoon for calendar year 2022. In its second long-range forecast, IMD said it expects rainfall during the current monsoon season to be 103% of the long-period average. For the fourth year in a row, the monsoon season is expected to be normal.

However, in a report dated 9 June, economists at Barclays said, "Despite an early start, the progress of monsoon has been tepid so far. Cumulative rainfall during 1-9 June was 41?low the long-period average (LPA), though it remains too early to draw any meaningful conclusions, given that it is still very early in the monsoon season."

The report further added that geographical distribution has also been weak, with many parts of north and central India experiencing large shortfalls in precipitation.

Normal monsoon is crucial this year. Hopes of revival in rural demand, which has been languishing lately, are largely pinned on a normal monsoon. A weak rural demand has weighed on the earnings performance of companies in sectors such as the fast moving consumer goods in the recent quarters. Companies have been struggling to meaningfully pass on the burden of increased input costs amid subdued rural demand. Within the automobile sector, the outlook on tractor sales, key for Mahindra & Mahindra Ltd, also depends on how the monsoon pans out.

Also, at a time when food inflation remains elevated, a normal monsoon would provide some breather to the Indian central bank as it tries to tame the raging inflation. Note that the Reserve Bank of India, at its latest policy meeting, has revised the retail inflation forecast for FY23 higher by 200 basis points to 6.7%. One basis point is 0.01%.

While it is wait-and-watch for equity investors on the monsoon front, economists at Yes Securities Ltd caution that the slow progress of the monsoon could impact kharif sowing. "Of critical importance would be the recovery of monsoon in July and August as these months are the most important for sowing activity," it said in a report on 9 June.