A common question for investors in India is whether or not there is any impact of the monsoon on the stock market. In this article we explore exactly how the monsoon rains do have an impact on the stock market, both negatively and positively, albeit not in a direct manner.
India is a nation that is largely agrarian. That is to say that it is highly dependant on agriculture. With around 55% of arable land being fed by rainwater, it is easy to understand why the monsoon is so very important for getting good yields from the farms. It is the yield rate which will have an effect on the markets.
YIELDS OF CROPS DRIVE RURAL SPENDING
The primary income of rural Indians is from farming and farming related occupations. When crop yields are good, rural income is boosted by crop sales. This encourages farmers to make more purchases and invest. It also means more disposable income in the rural areas, which benefits companies that carter for rural Indians. A good monsoon therefore equals good yields and that equals good news for those companies who are listed on the stock market that sell to rural areas. Their stocks receive a little boost.
POOR YIELDS DRIVE UP COMMODITY PRICES
In the opposite scenario, a poor monsoon leads to poor yields in the fields. Shortages of crop-grown commodities leads to increased demand for those particular commodities. This situation can be advantageous for certain commodity traders. To be specific, those traders who anticipated a bad monsoon may have bought FUTURES in order to ensure that they can buy quantities of specific commodities at a predetermined price prior to the monsoon taking place. They will then have full rights to purchase them at the agreed price, and then immediately sell them on for a profit at the current (inflated) market price once the harvest is over. However, they will be in the minority.
EXTENT OF THE IMPACT
While there are many scientific bodies that study rainfall, analyse its trends, and predict its future, their predictions are not 100% accurate and can not be totally relied upon. They may serve to be of more use for farmers to decide when and how much of particular crop they decide to sow. The overall effects of the monsoon have shown to have only a small impact on the stock markets, especially when taken outside of commodities. It may be surprising to you just how the share markets recover from monsoon effects. When a poor monsoon season has passed there is no time to dwell, as life goes on and so does trading. We also have to be clear that it is not the monsoon itself that has any bearing on the stock markets, but it is the YIELDS from the fields which decide whether it will be a good or a bad year. In future as India’s infrastructure improves and develops, it is hoped that farmers will be less reliant on monsoon rains. This can can be achieved by developing new and improving existing irrigation systems, rainwater harvesting and storing water for the future, and desalination plants which will provide cleaned sea water upon demand.
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