IMD predicts ‘normal’ monsoon, what does it mean for economy, market?
2 min read 26 May 2023, 04:38 PM ISTNormal monsoon augurs well for the economy as well as financial markets with domestic consumption focused companies to stand benefited, economists and analysts said.
PremiumThe India Meteorological Department (IMD) has forecast that India may receive normal monsoon rains in 2023. This augurs well for the economy as well as financial markets with domestic consumption focused companies to stand benefited, economists and analysts said.
In its forecast for the four-month monsoon season starting June 1, the IMD said the Southwest monsoon season from June to September over the country as a whole is most likely to be normal i.e. 96 to 104 percent of Long period average (LPA).
The monsoon rains are very significant for the Indian economy, as they help irrigate half of the country’s farmlands and influence the prices of essential food items. It also helps propel demand in the rural economy.
Read here: Weather update: IMD says monsoon most likely to be normal this year
“A normal monsoon augurs well for the cooling inflation. The inflation is already going down globally and with a normal monsoon, it is likely to ease further," said Madhvi Arora, Lead Economist at Emkay Global Financial Services.
Arora added that easing inflation bodes well for the Reserve Bank of India (RBI) monetary policy.
Meanwhile, IMD also said the monsoon core zone which consists of most of the rainfed agriculture areas in the country will most likely see normal rainfall i.e. 94-106 percent of LPA.
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“The larger worry this year has been that ElNino risks may lead to sub-par monsoon. While the IMD has favourably reduced probability of below normal monsoon to 45% in second LRF from 51% in first LRF, we will still keep a close eye on weather risks," said Kanika Pasricha, economist with Standard Chartered Bank.
She believes timing and distribution of rainfall will be in focus as well to assess impact on rural demand and food inflation.
Pasricha expects inflation to remain sub-5% in the near term and has forecast of 5.3% for FY24, in line with RBI estimates.
Cooling inflation has helped in easing margin pressure for the domestic companies. Additionally, the expectation of normal rainfall further improves the outlook for these sectors.
“A normal monsoon will likely boost domestic consumption. This will ultimately benefit and improve the outlook for sectors like FMCG, fertiliser and sugar. Falling inflation will bring down the cost and improve profit margins for these companies in the coming quarter," said Vinod Nair, Head of Research, Geojit Financial Services.
The consumption sector has posted a decent set of numbers in the quarter ended March 2023, with margin improvement led by falling commodity prices, he added.
“While the volume growth has not been good enough, margin of these companies have surged. Going ahead, lower production cost coupled with improved rural activity will aid earnings growth of these companies," Nair said.
Meanwhile, economists expect the central bank to maintain a status quo on repo rate in the next policy meeting.
“A healthy monsoon will increase farm productivity and will keep the food inflation under check, which can likely result in a positive economic outlook. And as long as inflation is hovering in between 4-5%, RBI would maintain a status quo," said an economist with a public sector bank.
In April, the RBI’s monetary policy committee (MPC) kept the policy repo rate unchanged at 6.50% and maintained its stance at withdrawal of accommodation ‘with a readiness to act if the situation so warrants’.
Speaking on the RBI policy, Pasricha said, “We expect a prolonged pause on rates and keeping a close eye on key risks to inflation - weather conditions, domestic and global economic growth and the trend in commodity prices going ahead".
