Mar­kets may Not With­stand a Poor Mon­soon This Year

In the past 5 drought years bar­ring the last mar­kets posted pos­i­tive re­turns, but if rain fails & mar­kets fall it could be a ‘buy­ing op­por­tu­nity’

The Economic Times - - Smart -

ET In­tel­li­gence Group: The past data on the ex­tent of mon­soon and the stock mar­ket move­ment shows that bench­mark in­dices con­tin­ued to gain even in the years of se­vere drought. How­ever, this year, ex­perts are con­cerned whether the broader mar­ket would con­tinue to stay un­af­fected if the mon­soon is be­low nor­mal for the third year in a row given the low reser­voir lev­els and shrink­ing farm in­come. The mon­soon ac­counts for 80% of the coun­try’s to­tal rain­fall and con­trib­utes to more than 50% of wa­ter re­quire­ments for farm­ing. In the past five drought years bar­ring the last fis­cal, mar­kets posted pos­i­tive re­turns dur­ing June-Au­gust pe­riod (the peak mon­soon pe­riod) and in the sec­ond half of the calendar year. A drought year is when de­vi­a­tion from nor­mal rain­fall is more than 10%. The me­dian re­turn of mar­kets dur­ing the mon­soon pe­riod in the pre­vi­ous five drought years was 5.4% and the av­er­age rain­fall de­vi­a­tion was 16.8%, ac­cord­ing to the data com­piled by ETIG.

There are three key rea­sons for the ris­ing con­cern among in­vestors. First, in at least past 50 years, In­dia never faced drought for three con­sec­u­tive years, which raises un­cer­tainty if mon­soon were to fal­ter in 2016.

AGRI CON­CERNS

Sec­ond, wa­ter lev­els in In­dia’s 91 large reser­voirs have de­pleted by one-third from the year ago lev­els. If mon­soon is er­ratic, it would im­pact wa­ter avail­abil­ity for in­dus­trial and agri­cul­tural use. Third, a de­fi­cient mon­soon will com­press farm­ers’ in­come more. In the cur­rent year, it will be the fourth crop pro­duce in a row that will turn cash neg­a­tive for farm­ers in case of an in­ad­e­quate mon­soon. Nearly half of the coun­try’s pop­u­la­tion is de­pen­dent on farm in­come and it con­trib­utes about 18% to the coun­try’s GDP.

An­a­lysts be­lieve that a fall in eq­ui­ties due to fear of de­fi­cient mon­soon would be an ex­cel­lent buy­ing op­por­tu­nity. No­mura said in a re­port, “Even as we are headed into un­char­tered ter­ri­tory, mar­kets should take rains in their stride and that the on­go­ing in­dus­trial re­cov­ery would play a larger role for mar­ket re­turns. Any fall in the mar­ket on mon­soon con­cerns would be, there­fore, a buy­ing op­por­tu­nity.”

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