How Monsoon Impacts The Indian Stock Market?

Have you heard this popular Bollywood song? 

Tip Tip Barsa Paani, Paani Ne Aag Lagayi

Monsoon can create any of these two types of Aag in the Indian stock market. 

The first one can be to turn all the stock gains red, resembling your money on fire. And, the second one can be about the stock gains being on fire or bringing a positive market sentiment. 

Either might be the case, but it is imperative to note that it is going to be as uncertain as to the monsoon. 

In this blog, we are going to discuss the impact of monsoon on the stock market. Let us begin by discussing the status of ‘Monsoon 2022’. 

Status of Monsoon 2022

It’s going to be early monsoon this year! 

The Indian Meteorological Department (IMD) recently predicted that the Southwest Monsoon might be early. They also mentioned that the two cyclones, Asani and Karim, might be the reason behind this. So, it is a piece of good news for those suffering from the scorching heat, dry spells, scarcity of water and drylands. 

But is the early arrival of monsoon good news or bad news for agriculture and other sectors? Let’s see.

• The Impact on Agriculture 

Typically the period between 15th May and 15th June is considered as sowing and seeding season in agriculture. The early arrival of the monsoon might impact the future production of Kharif crops. 

Kharif crops, also known as monsoon crops, are cultivated and harvested in the Indian subcontinent between June to November. A few examples of Kharif crops are rice, maise, groundnut, jowar, tur and cotton. 

Major Agricultural Scientists have claimed that Kharif farming might not be affected by early monsoon if it is evenly distributed throughout the season. However, there is no certainty about whether it will be evenly distributed or not. 

Therefore, the stocks of a few rice-related companies have gone upwards. Notable among these is Kohinoor foods which rose more than 21% during the last five days. Another stock is ITC, a major seller of rice, wheat, and leaf tobacco. The share price of ITC has also plummeted recently. 

Let us see how this will impact inflation.

• The Impact on Inflation

Inflation has already gone out of control. At present, the retail inflation is at an eight year high figure. In a problematic state, the Consumer Price Index (CPI) inflation for April 2022 was 7.79 per cent, as declared on 12th May this year. This is an overall percentage that differs from state to state. 

India’s food inflation, measured by CPI (food), was 7.7 per cent as of March 2022, year-on-year (YoY). The CPI measures the changes in the prices of consumer goods and services as purchased by households. Food has a weight of more than forty per cent in CPI.

Notable are the price rise of Kharif based commodities like rice and groundnut oil. 

A reduction in food inflation can be perceived positively by the stock market. The price of stocks related to agriculture and related activities can see an increase. Therefore, an early and well-distributed monsoon can help enhance the production in the Kharif season and might also help in reducing the prices of these commodities.

But the reduction in prices is still far and can be estimated during the Kharif harvest season. 

Apart from the agricultural activity itself, there are other aspects that might impact the stock market. Let us understand them in detail.

Monsoon 2022 Volatility Check Schedule

Other aspects like the possibility of a bank rate increase by the RBI, the uncertainty of when the war will be over etc., can impact the movement of stocks during monsoon. These are the instances that might affect the stock market during monsoon 2022. 

• The expectation around the increase in rates by the RBI

The Reserve Bank of India (RBI) recently announced a hike in bank rates that led to a steep decline in stock prices. The RBI increased the repo rate by 40 bps in May this year. With the overwhelming eight year high headline inflation, it is expected that the RBI might increase the rates again in June. 

If there is any rise in the bank rates, the small and medium businesses can be impacted negatively. Therefore, another downswing might be coming in the stock market this monsoon.

• The uncertainty around the end of the Ukraine- Russia war

It has been more than 85 days since the war between Ukraine and Russia began. This is one of the major reasons why we are facing record-breaking headline inflation. Will the war continue or will it be over during monsoon 2022 is uncertain. It is certain that the markets will be impacted by the end of this war. 

The end of the war might bring normalcy to the Black Sea trade route and get back to our export targets. 

Even the Monsoon impacts the stock market more than the Retail investors.
Monsoon: 1      Retail Investor: 0

• Supply Chain and Other Hassles during Monsoon

Construction projects of the major and minor categories are generally at a halt during monsoon. This is because of the hassles in the supply chain, the possibility of monsoon ruining construction and the fear of a monsoon linked disaster. Construction activities, especially of major kinds, resume after this period. 

Therefore, the prices of stocks related to construction, such as cement companies, paints, brickworks, building materials etc., can decline during this period. Already, the rise in supply chain cost due to the increase in the prices of petrol and diesel has led to the decline in profit of these businesses. 

With the early monsoon and the delay in the completion of construction projects, the profits of these companies might be impacted. 

However, construction is a water-intensive activity. With a regular and equally distributed monsoon, these businesses can benefit after the season is over. 

Summing Up

With the recent southward movement of the stock market, it is vital to analyse the impact of uncertainties. Monsoon is one of the most popular uncertainty. Its effects on the economy’s macros and micros are worth considering. So, to prepare better for the upcoming rainy days, we can prepare for the volatility ahead caused due to the early monsoon, the upcoming bank rate changes and the direction inflation might take after that. 

Whether the Ukraine-Russia war will be over during this period? Will the bank rates will be increased again? It is as uncertain as the monsoon to tell where the markets will be heading. 

Only time will tell whether the southwest monsoon will move the market south or push it upwards. The only medicine to enhance the immunity of your portfolio during monsoon can be staying invested as a long term investor.