According to brokerage house Motilal Oswal, below-normal monsoon would mean lowering of real GVA growth and reduced hopes of lowering of rate cuts by the Reserve Bank of India. (Photo: Reuters)
As Southwest Monsoon withdraws from West Rajasthan, the indications are clear that this could raise the rainfall deficit for the season. The overall monsoon rainfall deficiency hovers around five per cent. From June 1 to September 15, the country as a whole has recorded 771.8 mm of rainfall as against an average of 814.2 mm. This also means that 2016 could turn out to be third consecutive year of below-normal monsoon as against the prediction of above -normal monsoon this year. Only two weeks remains in the current monsoon season.
According to brokerage house Motilal Oswal, below-normal monsoon would mean lowering of real GVA growth and reduced hopes of lowering of rate cuts by the Reserve Bank of India. “With a cumulative deficit of around 22 per cent in past five weeks, Southwest Monsoon rainfall has turned from a surplus of 3 per cent of LPA a month ago to a deficit of 5% as of September 14, 2016,” Motilal said.
With the help of the analyst Motilal Oswal, we take a look at the 5 pointers on how lower monsoon will affect the markets:
1. Worse-than-expected monsoon may lead to lowering of real GVA growth projections: With monsoon at 5 per cent deficit as of Sept 15, 2016, it implies agricultural output growth of around 3% in FY17. This will wipe off 35-40 bps from real GVA growth expectations – may get revised down from 7.7 per cent to around 7.3 per cent.
2. Hopes of monetary easing dampens: Although it is difficult to establish direct relationship between inflation and monsoon, market continues to believe that better monsoon may help inflation ease faster, and thus open the window for sharp rate cuts. With a weak monsoon looming, such expectations of rate hike reduces.
3. Rural sector to remain under stress: Rural sector related stocks will see pressure as lower monsoon will affect the sector. Weaker-than-expected rains will increase pressure on the government to support the stressed rural sector which may imply compromise on the government’s ability to increase capital spending.
4. Cotton prices may increase further or remain high: Raw cotton prices have increased 30 per cent YoY in July 2016, from below Rs 100 per kg a couple of months ago to Rs 117 per kg. Higher cotton prices may hurt margins of spinning and textile companies.
5. Pulses prices may be reluctant to come down: Notably, only one-third of pulses production occurs in the Kharif season, while the rest happens in the Rabi season. In case 2016 turns out to be the third consecutive year of below-normal monsoon, the level of water reservoirs may remain subdued, hurting sentiment on Rabi season output. Accordingly, pulses prices may be reluctant to come down (inflation rate, however, will come down).