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WHAT DOES A BAD MONSOON MEAN FOR THE STOCK MARKET?

Investment | Published on Jul 21st 2016 | Comment(s) 0
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The monsoon season ushers in rainfall for 4 months from June to September in this country. For an agriculturally dominant developing country, rainfall is extremely important. This in turn affects the stock market for better or worse, accordingly. While a majority of the population of India depends on agriculture for their daily living expenses, the agricultural sector in turn depends on the monsoons.

Even though you cannot find any direct link between monsoons with the stock market, however there is an indirect link that exists and affects it. A bad monsoon will usher in a bad year for agriculture and this is extremely problematic for an agriculturally dominant country. Similarly a good monsoon will mean good produce and it will affect the stock market in a different way.

Why is the Monsoon Season so Important?

As you already know, India’s predominant industry is agriculture, so a lot rides on the erratic monsoons. More than 55% of India’s cultivable land depends solely on monsoons and 15% of the entire Indian economy is based on products derived from agriculture. So, a good monsoon will ensure high production in the agricultural sector, which in turn accelerates economic growth. If there is less rainfall then there is an evident delay in crop production.

Impact on Stock Market

The production of crops gets a boost when the monsoon is normal. Even if the monsoon rains get delayed by a few days, it can have a pretty adverse effect on the economy. On the other hand, if the rains are on time, a good crop will curb inflation in the country. Production of crops receive a much needed boost if the monsoon arrives on time. This reduces the prices of vegetables and other farm products up to a certain extent because of an increased supply. The monsoon rains are the key to understanding how agricultural output, inflation, consumer behavior and economic growth will change. Normal rainfall will usher in growth for the nation while anything below that will only cause trouble. If the rainfalls are late, farmers cannot do anything but to push back the date of sowing seeds. The country is able to maintain a good GDP if the monsoons are good, which in turn gives a boost to the NSE stock market. Not only that, surplus food production will enable the government to export it, leading to gain of foreign currency that will boost the stock markets further. Good monsoon also ensures that people of our country are able to buy goods, thereby pushing demand for industrial produce. In fact, many sectors like gold, farm equipment, fertilizers are directly linked to the success of monsoon whereas other sectors are indirectly linked to the success or failure of the monsoons.

Bottom Line

The agricultural sector is the most vulnerable when it comes to the erratic rain patterns. The Indian economy is highly dependent on the rains, and that makes the stock market dependent on it too, indirectly. Indian companies look forward to the monsoon for respite. Good monsoons definitely improve the economic scenario in India which involves falling rupee, high fiscal deficit, poor earnings etc. Good monsoons mean greater purchasing power for people in the rural areas and that will increase their demand of certain consumer products.




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