The sharp spike in crude prices triggered by the West Asia conflict had threatened to cause a balance of payments problem for India with serious economic consequences.
The stock market was impacted by fears of the potential fallout. But fortunately, a deal has been reached between the US and Iran, and consequently, there has been a sharp correction in the price of Brent crude to below $73.
This is a big relief for the Indian economy and stock market. Rupee also has stabilized.
The El Niño threat
Now, a new threat has emerged, threatening to impact the market. The Indian Meteorological Association had predicted the monsoon this year at 90% of the long-term average. 10% deficiency will not pose a big threat since we have ample food grain reserves and the water levels in reservoirs are good, thanks to above normal rains during the last two years.
India’s irrigated area has been rising steadily, and now 55% of cultivated land has an assured water supply. Therefore, food grain output will not be impacted significantly.
However, lower agricultural growth will lead to a slightly lower GDP growth rate of around 6.5% for FY27. A concern is vegetable inflation, which may be caused by farmers shifting from rain-fed vegetables to grains like millets.
El Niño need not always lead to poor monsoon
It is also important to understand that El Niño conditions need not always lead to a deficient monsoon. Between 1951, and 1922 there were fifteen El Niño years.
Out of these fifteen, six years (40%) gave normal or above normal rainfall. In 1997, despite a Super El Niño, India received 94.4% rainfall. So, it is too early to assume deficient rainfall.
Impact on the stock market
If the monsoon dips to less than 90% of the long-term average and creates drought-like conditions, the economy and the stock market will be impacted. The early trend in the monsoon indicates a big shortfall.
As of June 23 June, monsoon deficiency is at 43.2%. If rainfall doesn’t improve in the coming weeks, IMD’s forecast may come true; it can be even worse.
Sectoral impact
The sectors that will be impacted by deficient monsoon will be fertilisers, tractors, FMCG and entry-level two-wheelers.
These are segments which are either dependent on farm incomes or rural demand.
Demand for fertilisers and tractors is directly correlated to the monsoon.
About 54% of entry-level two-wheeler demand comes from rural areas.
For companies like Hero MotoCorp and TVS, this is above 60%. Tractor manufacturers like M&M, TAFE and Escorts Kubota might be affected by weak demand.
However, the impact will vary across companies. For the largest tractor manufacturer, M&M, tractors account for only about 21% of revenue.
Since the automobile division of the company is doing well, M&M may not be affected significantly.
TAFE is not a listed company.
For Escorts Kubota, above 80% of revenue comes from tractors and other agricultural equipment.
Fertilisers and crop protection companies will be impacted by the poor monsoon.
Defensive sectors
Premium consumption, premium automobiles, urban-centric demand sectors, banking, IT and export-oriented segments will not be impacted by the poor monsoon.
Pharmaceuticals and health care are safe bets. Pharmaceuticals normally outperform during poor monsoon since their demand is inelastic.
In conclusion, investors should watch out for the trends in the progress of the monsoon.
Depending upon the trend, the portfolios can be finetuned based on the above impact assessment.
Disclaimer: The author of this article is Chief Investment Strategist at Geojit Investments. Views are strictly of the author, and not of Mint. This article is for educational purposes only and does not constitute investment advice. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
