Impact of Monsoon on the Market

Neither too-much nor too-little, just perfect, is what we would like our monsoon season to be. What we have now is a situation where two regions are facing extreme weather conditions, while the overall looks good (4% above normal as of 27 July). Gujarat and Rajasthan have received rains in excess of 60% from LPA, whereas Tamil Nadu and Karnataka are 25-30% below normal. Fortunately, the weather bureau is forecasting overall rains to mellow in first half of August and pick up in the southern region in the second half of the month.

Here is a quick look at the potential impact trail:

Inflation – Tomato price to remain firm till end-Aug: The current spike in tomato prices (+59% y-o-y & 135% m-o-m) is due to 31% y-o-y fall in arrival of the summer crop (May-June). Reports suggest low realization after demonetization led to poor crop care by farmers, thereby compromising on yield. The next leg of tomato supplies will come at end-Aug when crops in Nashik (MH) and Kolar (KN) are harvested. Tomatoes have 0.57% weight in the CPI index and would add ~30bp to the headline inflation rate in July (~20bp more than June reading). More importantly, food price spike is so far narrowly concentrated and temporary, for e.g. other vegetable prices like potatoes and onions remain weak at end July. We expect July CPI inflation to remain below the 2% mark (expected on 14 August).

Adverse weather to hit non-agricultural activities in Gujarat and Tamil Nadu: Both states together make up 29% of national industry output and 16% of GDP. Excess rains (due to shut down) and deficit rains (lack of processing water) could impact Gujarat’s chemicals & pharmaceuticals, and Tamil Nadu’s textiles & engineering industries. (see report inside for more details)

RBI MPC to take comfort on monsoons when it meets on 1 & 2 August: Sowing has come off sharply but remains in growth territory (+1.8% y-o-y). Hard data suggests that outside of a few vegetables like Tomatoes, high food inflation is not threatening a comeback. The issue as we’ve said before is agri-marketing stress, so headline inflation is likely to rise more gradually towards 4%.

Watch out for

Weekly monsoon progress

Manufacturing PMI for broad data point on restocking demand post GST (1 August)

RBI monetary policy (2 August)