Markets
With a sombre start, spectre of a disappointing monsoon season lurks
Summary
- All eyes will now be on the rainfall trajectory in July given that most of the kharif crop sowing activity is completed by this period.
Clouds of a disappointing monsoon season are hovering over the Indian economy. The pace of rainfall was a letdown in June, which typically marks the beginning of the monsoon season. But as the chart shows, the cumulative rainfall was in the deficit zone last month.
More importantly, the trend seen in June is a departure from India Meteorological Department's (IMD) initial forecast of an above-normal monsoon this year.
Moreover, reservoir storage levels continue to fall. As of 27 June, storage in 146 key reservoirs stood at about 20% of total capacity (lower than the previous week's 21%), according to a Barclays report dated 1 July.
All eyes will now be on the rainfall trajectory in July given that most of the kharif crop sowing activity is completed by this period. Spatial distribution will also be a crucial factor to watch out for.
Plus, whether the rainfall in July is able to compensate for the gap in June remains to be seen.
Also Read | Mint Primer: Ever seen the rain? The price of a truant monsoon
Monsoon patterns tend to have a direct impact on prices of agricultural products, mainly vegetables, fruits and pulses. A worry is that sticky and elevated prices of these items could trigger the food inflation menace. Thus, making it tricky for the Reserve Bank of India to decide on interest rate cuts.
Unfortunately, the adverse impact of heat waves seen in various parts of the country along with a weak start to the monsoon, is already being felt on prices of essential items.
Also Read: Mint Quick Edit | Will heat deliver a torrential monsoon this year?
"Per National Horticulture Board, on a CPI (consumer price index) weighted basis vegetable prices are higher by 21% month-on-month, which is higher than seasonal," IDFC First Bank said in a report dated 28 June.
The increase is led by the jump in prices of tomato and onion. The upward pressure is also seen in fruits with prices up by 8.6% month-on-month, higher than seasonal momentum, added the report.
In May, headline CPI inflation stood at 4.7%. Concerns are emerging that the June reading may be higher. Usually, the spike in vegetable prices is temporary in nature, but the same cannot be said for inflationary pressures in cereals and pulses.
Further in a spillover impact, rural incomes could suffer, further delaying the demand revival in the region. This could be a sentiment negative for the Indian stock market.
Shares of companies having exposure to rural regions such as FMCG, paints, tractors and two-wheelers may feel the heat of subdued rainfall, increasing the risk of earnings downgrades.
