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A good monsoon outlook will be gamechanger for economy, stocks.

Date: 13-05-2017
Subject: A good monsoon outlook will be gamechanger for economy, stocks
India being an agrarian economy, monsoon rains are very important. The agriculture sector accounts for roughly 15 per cent of India’s GDP and 40 per cent of the rural economy and nearly 20 per cent of agriculture GDP is directly dependent on the monsoon rains. 

The Indian Meteorological Department (IMD) has said monsoon rains could be ‘normal’ this year and may bring 100 per cent rainfall instead of 96 per cent it had projected earlier. Notwithstanding the modest contribution of agriculture to the overall GDP, good monsoon augurs well for India’s macros and this will give enough leg room to the government to support growth in the economy. To note, a good monsoon outcome can raise agricultural output, and thus improve gross value added (GVA) growth. 

Recently, the International Monetary Fund (IMF) forecast India’s growth to rebound to 7.2 per cent in financial year 2017-18 and 7.7 per cent in 2018-19. 

There is anticipation that good monsoon rains this year would revive rural demand and give more room to the Reserve Bank of India to cut interest rates going forward, as monsoon rains influence RBI’s policy decision due to its impact on agri-inflation. RBI has raised its inflation estimate for 2017-18, expecting it average at 4.5 per cent in the first half and 5.0 per cent in the second half, which is higher than its target. The next bimonthly policy review of the Reserve Bank of India is due in June and RBI is expected to keep interest rates unchanged. 

The expectation of normal monsoon boosted sentiments among market participants, domestic investors in particular, and Nifty50 breached the psychological level as stocks of consumer goods, FMCG and agriculture dependent sectors rallied. The market was cheered as a normal monsoon can increase spending ability of the rural population, which is dependent on agriculture, which can in turn help earnings growth of FMCG, consumer durables, agri inputs, fertiliser and cement companies. 

Actually, the government’s demonetisation drive, which was announced on November 8, 2016, badly impacted these sectors. Among all, the FMCG sector witnessed a noticeable slowdown. 

However, the long-term outlook for these sectors is positive as earnings of the companies from these sectors have been encouraging so far. With a normal monsoon, earnings are expected to grow faster and that would in turn drive stock prices higher. Investors who have invested or would invest in stocks such as Dabur, HUL, Bajaj Corp, Meghmani Organics, PI Industries, UPL, Havells and Voltas are expect .. 

Source: economictimes.indiatimes.com

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