Rains not the only worry for markets
3 min read . Updated: 12 Apr 2023, 10:29 PM IST
PremiumThis year, the risk of El Niño conditions loom. In this backdrop, how the monsoon pans out will be closely watched.
It is raining forecasts—for monsoon, corporate earnings, and global economic growth. The India Meteorological Department has predicted a normal monsoon at 96% of the long-period average (LPA) this year. In a slight contrast, private weather forecaster Skymet expects below normal monsoon at 94% of LPA.
This year, the risk of El Niño conditions loom. In this backdrop, how the monsoon pans out will be closely watched. What also matters is the timing of monsoon arrival and spatial distribution, crucial for reservoir levels.
Poor rainfall has many repercussions. It can potentially hurt agricultural output, which could translate into lower farm incomes and hurt rural demand. Then, companies in the automobile, consumer durable and FMCG sectors, having a meaningful exposure to the rural markets could feel the heat.
Meanwhile, the implication of normal or below-normal monsoon on food inflation has not been too clear in the past (See chart). That said, the trajectory of monsoon cannot be overlooked when gauging the food inflation outlook.
“The link to food inflation, however, is not immediate. In the past, food inflation has increased despite good rainfall and vice versa, which suggests there are many other factors that determine the food inflation outlook," said a report by Nomura Global Markets Research on 11 April. In March, inflation measured via consumer price index stood at 5.66% versus 6.44% in February. Latest reading is below Reserve Bank of India’s (RBI) upper tolerance band of 6%.
As inflation moderates, there could be greater clamour for rate cuts by RBI. But that’s still some time away. Now, investors will focus on March quarter (Q4FY23) results. Easing commodity costs are a breather for many firms, but there may be demand-led challenges in FY24.
Rural demand growth has been lagging expectations. Management commentary of FMCG companies has not been encouraging on rural demand recovery and this concern lingers for the sector, according to Kunal Vora, head of India equity research at BNP Paribas. “Right now, revenue growth looks good owing to price hikes that companies have taken. However, as base effect wanes and price cuts occur in certain categories, FMCG companies are likely to see a moderation in revenue growth and this should start to reflect from H2FY24 onwards," he said.
Besides, the earnings outlook of banking, financial services, and insurance companies appears subdued, going ahead. System credit growth is expected to taper and net interest margins of banks are expected to be under pressure.
Further, turmoil in US and European banking sectors has added to concerns of already muted global growth. So, revenues of Indian IT services firms could take a hit.
Global macro conditions are still challenging. On Tuesday, the International Monetary Fund trimmed its global growth forecast for 2023, citing broad-based and sharper-than-expected slowdown amid higher inflation. It also cut its FY24 India GDP growth forecast by 20 basis points to 5.9%.
India is said to be better placed than many Asian peers given its relatively stable macros. But valuations are demanding. MSCI India index is trading at a one-year forward price-to-earnings multiple of 20.46x, a premium to MSCI Asia Ex-Japan and MSCI Emerging Markets Index, showed Bloomberg data. Besides, in a pre-election year, the mood among investors tends to be jittery.
Investors would now focus on whether the US Federal Reserve pauses its rate hiking spree and how inflation and corporate earnings pan out in India, Vora said.