Indian equities can weather marginal monsoon failure

Last year, 30% of the total area of the country received deficient rainfall as the rainfall received in the first month of 2014 monsoon season was the 4th lowest month recorded in the last 114 years! In this background, a few days ago, the US weather agency has forecast an enhanced probability for El Nino event developing in the equatorial Pacific Ocean. This has raised fear that the monsoon rainfall this year might be adversely affected in India as there is a strong correlation between an El Nino event and a poor monsoon.

Indian equity market is at a trigger point now – normal monsoon would help in continuation of reversal of interest rate cycle in the country. The same would augur well for further recovery of the industrial economy and therefore, the continuation of structural bull run in the domestic equity markets. 

Indian economy can manage monsoon failure once in a while – however, in a normal scenario, it is too tough for the Indian economy to manage even marginal failure of monsoons for two consecutive years. The accumulated pressures on both supplies and prices of food crops would be enormous.

Still the domestic equity markets could be lucky enough to withstand the damage from any possible marginal failure of forthcoming monsoon this time. Despite 12% deficiency in the overall rainfall last year, the total food grain production was estimated to fall by just 3% yoy to about 257 million tonne in the current crop year. This would still be the 4th highest quantity of annual production in the country. Moreover, as against the buffer stock norm of 21.41 million tonne of rice and wheat (as on January 1 of each year), total central pool stocks were 61.6 million tonne as on January 1, 2015.

Along with the crude oil prices, the crop prices also fell down substantially across the world since middle of last year. The Food Price Index of FAO is down 19% yoy and it quotes at a 6-year low – this is due to improved global crop prospects and over 40% fall in the exchange rate of Brazilian (a major producer of agri crops in the world) Real against the US dollar in the last one year. The FAO estimates the cereal stocks-to-use ratio at 25.9% in 2014-15, the highest value since 2001-02! Thus, the domestic economy can withstand the inflationary impact of possible marginal failure of monsoon second time in a row. The risk to the structural bull run would emanate only if the rainfall failure is disastrous enough to pull down the income of agricultural sector substantially.