India's weather department says Monsoon to be normal this year; here's what it means for the economy and the market

The forecast of a normal monsoon for the fourth consecutive year is a major relief for the rural sector as well as for the broader economy in general at a time when concerns over economic growth are growing.

As per Skymet, a prominent weather forecasting services provider, Monsoon rains are expected to be 98 percent of the long-term average, and there is a 65 percent chance that India will get average rainfall.

India Meteorological Department (IMD) said that India is likely to receive 99 percent of long-period average (LPA) rainfall during June-September, with an error margin of +/-5 percent.

A normal monsoon is expected to bode well for the agriculture sector which has about 16 percent share of India’s total output. Healthy growth in the agricultural sector can influence the overall economic outlook significantly.

Monsoon and the Indian economy

The monsoon is a seasonal change in the direction of the prevailing winds of a region. As highlighted by a National Geographic report, the summer monsoon and the winter monsoon determine the climate for most of India and Southeast Asia.

Usually, the monsoon season starts with rains on the southern Kerala coast around June 1 and covers the entire country by early to mid-July.

The agriculture sector is considered to be the backbone of the Indian economy but the monsoon is extremely important for not only the agriculture sector but also for the industries and households since the country gets around 70 percent of its annual rainfall in the monsoon season only.

The performance of the monsoon affects the yield of several key Kharif crops like rice, pulses and some oilseeds. Besides, the monsoon is extremely important for rabi crops as it impacts the groundwater levels as well as water reservoirs which are critical for irrigation.

A good monsoon leads to increased employment in the agriculture sector which results in higher cash flow into the economy.

Besides, strong crop yields keep prices of food grains under check, thus keeping inflation low. Also, many industries, which require agri-based raw materials such as cotton, vegetable oils, natural rubber and sugarcane, have to spend less on raw materials which results in low prices of the final goods.

With normal monsoon, the stress on agri sector is less which boots the loan portfolio of banks. Good monsoon also reduces government spending on subsidies as it can reduce demand for subsidised diesel.

"The encouraging forecast of a normal monsoon in 2022 coupled with healthy reservoir levels in all the regions, augur well for timely onset of Kharif sowing. However, with contact-intensive jobs reviving in urban areas, we remain concerned that a shift in labour availability may constrain acreage for the Kharif season. Moreover, the availability and pricing of fertilisers need to be watched," said Aditi Nayar, Chief Economist, ICRA.

Overall, a healthy monsoon has many direct and indirect benefits and it contributes significantly to the overall economy.

Which sectors will be in a sweet spot?

A normal monsoon could help the overall market as crop prices worldwide are at a record high and a good monsoon could moderate domestic food inflation, G Chokkalingam, Founder & Head of Research, Equinomics Research & Advisory observed.

Chokkalingam believes FMCG and building products could do well in the case of a normal monsoon due to increased rural demand. However, tractors and two-wheelers which traditionally get benefits from successful monsoons may not benefit this time, he said.

"High base of sales volume and high material costs would impact sales of tractors this year. High material costs, high fuel costs and significant shift to electric vehicles space would impact traditional fuel-based two-wheeler manufacturers," said Chokkalingam.

Mitul Shah, Head of Research at Reliance Securities, underscored monsoon has a direct co-relation with agri output and rural economy. Therefore, a favourable monsoon scenario helps agri-based sectors like fertiliser, agrochemicals, tractors and tillers, FMCG and consumer segments.

Brokerage firm CapitalVia Global said tractors, two-wheelers, automobiles, rural lending, agro, chemicals, and FMCG sectors can get benefitted from a normal monsoon.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint Genie.