Mumbai: The India Meteorological Department’s (IMD) prediction of a normal monsoon this year will act as a sentimental positive for stocks, according to analysts.
The forecast for normal rains—which will support agricultural production and reduce inflationary pressures—is welcome news at a time when geopolitical tensions have dampened investor exuberance.
The Sensex and Nifty have lost around 1% each this month, as on 18 April, although their gains since January are still above 10%.
“Any positive news is welcome for the markets now,” said Deven Choksey, group managing director of KR Choksey Investment Managers Pvt. Ltd.
The IMD has predicted that rainfall this year will be 96% of the long-period average. Rains between 96% and 104% of the long-period average are considered as normal.
Pankaj Pandey, head of research at ICICI Securities Ltd, said that the estimate will positively surprise the markets.
“The markets were worried about a deficit monsoon and IMD forecast will put that to rest now. Driven by liquidity, the markets will continue to rise as physical assets have not given positive returns as compared to financial assets in FY16,” he said.
Analysts said that this was good news, especially for consumer-oriented sectors such as two-wheelers and packaged consumer goods which have been among the hardest hit owing to demonetisation. The government’s move to invalidate 86% of currency in circulation meant that these industries couldn’t reap the benefits of good rains last year.
“Consumption sectors like autos especially two-wheelers, FMCG and banking to some extent will be the biggest beneficiaries of a normal monsoon which were reeling under pressure due to demonetisation,” said Ashu Madan, president - core client group at Religare Securities.
A good monsoon could also put an end to the almost continuous earnings downgrade that the markets have been witnessing in recent months. Poor earnings prospects have pushed Indian stocks among the most expensive in the world.
However, analysts are also cautious citing geopolitical tensions which have emerged as the biggest risk to the market’s performance now.
“Though monsoon estimate is a positive factor but uncertainty due to geopolitical tension is a bigger worry for investors which will keep the markets under check,” said Madan.
US intervention in Syria and Afghanistan and tensions in Korea are hurting global stability. Foreign institutional investors (FII) sold $136.79 million in April after a record buying of $4.6 billion in March.