Favourable monsoon forecast may have limited impact on markets: here's why

The Sensex has often given double-digit returns in below-normal rainfall years

The S&P BSE Sensex has given average returns of 29.75 per cent during below-normal rainfall years – those in which rainfall is at least 10 per cent short of the long-period average (LPA), according to the India Meteorological Department.

Business Standard looked at monsoon data and the BSE Sensex’s performance over the past 15 years. Here is what we found:

The Sensex was up 13.08 per cent in 2004, when rainfall fell 13 per cent of the LPA. It rebounded 81.03 per cent in 2009 after the global financial crises, when rainfall fell short by 22 per cent. It again rose 29.89 per cent in 2014, when rains fell short by 12 per cent. The only exception was 2015, when the index fell 5.03 per cent, even as rainfall fell 14 per cent short.

G Chokkalingam, founder, Equinomics Research & Advisory said the monsoon had been losing significance for markets.

"Rains are important from the inflation and rural demand point of view, but the share of agriculture in the economy is decreasing. The majority of gross domestic product is no longer dependent on monsoons," he pointed out.

The India strategist at a foreign bank agreed that the effect had not been statistically significant. In fact, he added that even good monsoon carried the possibility of some degree of pain.

"Good rainfall may be nice from the perspective of lower inflation, but there has been a glut in food production in the recent past. This could put some pressure on farm realisations," he said.

Less money in rural hands has a negative impact on consumption trends.

Monday’s monsoon forecast came even as markets had risen for an eighth day in a row.

This rally has caused the gap between bond and equity yields to widen. The gap between the 10-year government bond yield and the S&P BSE 500 earnings yield is now close to the levels seen before significant market declines.

The 10-year yield was at 7.49 per cent on Monday. The earnings yield was at 5.51 per cent. If April finishes at the same level, the 1.98 per cent gap between the two would end higher than it has been in 90 per cent of the months over the past decade, shows a Business Standard analysis. The calculations used Bloomberg data stretching back over the past 10 years.

Large gaps tend to signal corrections, going by previous years, when such gaps widened, including in late-2007.

One will have to see if the markets hold on to gains over the next month, said the foreign bank strategist quoted earlier. "This has been something of a relief rally, despite geopolitical developments, aided by earnings and some relief on yields... but things are still iffy," he said.