Market sentiment boosted by monsoon and liquidity

Indian economy is currently reeling with the ongoing Covid-19 pandemic severely impacting the economic activities as the country was under complete lockdown from the last couple of months. From the month of August 2020, Unlock 3.0 has been announced under which minor relaxations have been provided to kick-start the growth cycle again. The ongoing pandemic has definitely hit all sectors but the agriculture sector is signalling a point of positivity.

In the past two months of June and July 2020, Indian soil witnessed approximately 30% more rainfall above the average monthly figures. The Indian meteorological department has predicted an above average monsoon rains for the second straight year fuelling hopes of rise in farm output and rural demand for various products and industries as a whole.

The southwest monsoon plays a significant role in India's growth story and because it accounts for 70-75% of the total rainfall that country absorbs in a year and is therefore, of high significance in the agricultural calendar as well. A healthy monsoon season might be positive on the sentimental point of view as a good part of the economic growth depends on monsoon movement which in turn decides the fate of the agricultural output.

There are many reasons why monsoon and agriculture activities play a very vital role. Agriculture sector may contribute around 15-17% of the GDP but directly or indirectly it accounts for 65% of jobs which has a significant impact on the demand outlook. Historically, the monsoon clouds and D-Street movement have one thing in common that both are unpredictable. But what is predictable is how the monsoon will impact a few sectors and it becomes important for investors to have the right type of investment during the current pandemic conditions. As good monsoon is directly proportional in uplifting rural spending, many industries are likely to see a rise in demand of their products and services.

Most beneficial industry would be the FMCG (fast moving consumer goods) as the higher purchasing power of rural India would increase the demand of their products. This will reduce input costs; improve financial performance such as rise in margins and net sales. If this is the case, then stocks will also see positive performance in their valuation.

The improvement in rural consumer sentiment will benefit the two-wheeler and low-cost four-wheeler segment as well. Even the tractor sales are expected to increase tracking demand for good cultivation in the agricultural lands. However, sales in the urban areas may get impacted due to the industrial slowdown amid the Covid-19 pandemic. The sales of the fertilizer companies usually deliver record high numbers near the monsoon season amid rise in demand from the rural areas. We have already seen record production from some known fertilizer companies in the recent past indicating higher sales activity.

Apart from Monsoon, Indian equity markets will also have a close watch on how the economy digests the current slowdown caused due to pandemic and how the economic activities rise back to pre covid levels. At the same time, market participants will also have a close check on the global market movements along with domestic economic outlook and even the result season which would have a direct impact on the sentiments of the market.