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Have markets over-reacted to monsoon forecast?

June 04, 2015 09:03 IST

MonsoonThe Indian Meteorological Department, on Tuesday, revised downwards its monsoon forecast to 88 per cent of the long-period average, stoking fear of a drought and a possible spike in inflation.

The Reserve Bank of India indicated it would wait for the data on monsoon and inflation before cutting rates again.

Following these developments, the BSE Sensex tumbled over 1,000 points in two trading sessions to 26,837, with interest rate-sensitive stocks such as banking, automobiles and real estate coming under heavy selling pressure.

While the domestic forecaster has sounded caution, Skymet, a private agency, has not downgraded its estimates,  sticking to its earlier forecast of a normal monsoon.

Given the wide divergence between the two forecasters, which one should you believe?

In 2009, IMD forecast the monsoon for the year would be normal. Two months later, in June, it scaled that down and said the monsoon would be slightly lower than normal levels.

By the end of 2009, both the predictions turned out to be  wrong, as India witnessed its worst drought in 30 years.

Explains G Chokkalingam, founder & managing director, Equinomics Research & Advisory: “In the last three years, errors in the IMD forecast varied from 600 bps to 700 bps.

“The highest rainfall happens normally in July and August. So, the performance of these months is crucial.

“What matters to the economy is not only this cumulative rainfall but also the spatial distribution.”

Since 1950, there have been 19 El Niños. During these years, India has seen below normal or deficient (or drought-like) rainfall in 11 cases, normal rainfall in seven and excess in one, according to reports.

In fact, in 1997, which saw one of the strongest El Ninos, rainfall during the monsoon season was normal (105 per cent of the LPA).

Have the markets over-reacted?

Chokkalingam does think so. “It is too early to panic because of the monsoon forecast and on its impact. Unless the actual rainfall fails miserably, both in terms of quantum of rainfall and spatial distribution, India would be forced to continue with easing of benchmark interest rates.

“There is no need to panic and one should continue to invest with preference towards pharma and information technology stocks,” he says.

Sonal Varma, an economist with Nomura, says though overall risks to agricultural production, rural demand and food price inflation have increased, the actual impact will be known only sometime in July.

Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India), also feels the markets seem to have jumped the gun.

“Also, one must note there are a lot of agencies which forecast the rainfall would be deficient.

“RBI has taken cognizance of that and said they will take a pause on the interest-rate easing cycle.

“The earnings season, too, was not great. All these things have contributed to the negative sentiment. We need some catalysts to change all this,” he said.

“For the Nifty, we feel 8,200 is our worst-case target, from a 12-month perspective.

“By December, we don’t see the Nifty much below 8,200. We prefer industrial stocks to consumer or consumption-related stocks,” he adds.

Image: A farmer; Photograph: Reuters

Puneet Wadhwa in New Delhi
Source: source image