IMD sees decent monsoon, counters Skynet's downbeat forecast

There was some cheer for traders and analysts after the India Meteorological Department on Tuesday forecast that the June-September monsoon is likely to be 96 per cent of the long-period average.

This lifts some of the gloom after independent weather forecasting agency Skymet in March highlighted a possibility of below normal rains this year owing to high chances of El Nino. Skymet has predicted the monsoon's arrival in Kerala between 28 and 30 May.

''IMD in their first report has said monsoon will be normal and they have maintained their forecast, which will lead to a rally in the market. Fertilizer and fast-moving consumer goods (FMCG) stocks are likely to support the move,'' A K Prabhakar, head of research at IDBI Capital, told Moneycontrol.

According to the Met's classification, the monsoon is considered normal if rains are between 96-104 per cent of the 50-year average rainfall of 89 cm. The monsoon is taken to be below normal if rains are between 90– 96 per cent. If less than 90, it is considered deficient.

"Monsoon in India still holds significance although the impact has been reduced over the years with strong irrigation network, farm mechanisation and other modernisation efforts,'' Siddhartha Khemka, head – equity research (wealth), Centrum Broking Ltd, told Moneycontrol.

However, in vast parts of the country, farmers depend entirely on rainfall due to poor irrigation facilities. So, good monsoon is essential for the rural economy.

 ''A normal monsoon is vital for the economy as a lot of other sectors are also dependent on agriculture. The equity market is already hoping for an overall consumption revival which benefits a lot of sectors like banking, non-banking finance companies (NBFC), FMCG, auto, consumer durables, building materials etc, where the rural segment has become a key growth driver,'' he said.

The monsoon is regarded as an important determinant for market direction. India saw a good monsoon last year after a gap of two years, which led to a reduction in prices and broad improvement in the economy.

''This trend of normal monsoon has to continue, especially given the change in Reserve Bank of India's monetary stance to neutral. The outlook of monsoon will impact the Reserve Bank of India's future measure which will limit the chance for a further reduction in the cost of funds and spur in inflation,'' Vinod Nair, head of research at Geojit Financial Services, said.

''Additionally, the market is gradually picking up from the blow of demonetisation. A normal monsoon will result in investors' optimism on the outlook for the market led by increased consumption and higher economic activity. It also gives justification for the current premium valuation to sustain in the near term,'' he said.

Since 2000, there were five years when the monsoon was 10 per cent below the long-term average. Two of the biggest falls were in 2009 with rains falling short by 21.8 per cent, followed by 2002 when the monsoon fell short by 19.2 per cent. In 2004, 2012 and 2014 rainfall was short by around 13 per cent.

The real impact of monsoon will be known only by end of August or September, but there is a tailwind from the 2016 monsoon which will aid rural demand for now.

''Last year's monsoon was good. So there's a tailwind of good rainfall on rural demand. Therefore, immediate impact may not be much in terms of demand for these sectors,'' Harsha Upadhyaya, chief investment officer (equity), Kotak Mutual Fund, said.

For the second year in a row, the India Meteorological Department (IMD) said the monsoon is likely to be just normal at 96 per cent of the Long Period Average (LPA) this year. An assessment of the specific impact of the monsoon on the economy would, however, have to wait till IMD releases its final figures.

The IMD attributed the projection to a weakening of El Niño and the Indian Ocean Dipole (IOD) turning positive. Both factors are seen combining to boost the southwest monsoon, though doubts linger over the intensity of rain. The IMD predicted a 38 per cent chance of near-normal showers.

The June-September monsoon rainfall this year is expected to be 96 per cent of the long-term average with a 5 per cent error margin, director general of IMD K J Ramesh said on Tuesday, bringing cheer to millions of farmers in the country who depend on monsoon rains for agriculture activities.

Rainfall below 90 per cent of the average is considered deficient, above normal at 105-110 per cent, and excessive above 110 per cent.

The IMD issues its first monsoon forecast in April and updates it in June. The department, which used a combination of statistical and ocean atmospheric models, said both showed rainfall this year would be normal.

''Earlier, there was a more than a 50 per cent chance of El Niño developing, which has now gone down,'' Ramesh said. Private weather forecasting agency Skymet has said rainfall this year will be below normal at 95 per cent of the LPA.

IMD will update the forecast in early June, by when a clear picture would emerge about El Nino phenomenon that disrupts global flow of winds after the warming of the equatorial Pacific.

Monsoon delivers three-fourths of the country's annual rainfall, and is crucial to an economy where more than half the population depends on agriculture for their livelihood, and where monetary policy is linked to food inflation.

Also, with a majority of people still living in rural areas, higher income in the hinterlands boost overall sales of gold, cars, motorcycles, tractors and consumer goods.

"This year the monsoon will contribute similarly as last year to Indian agriculture…and there was good contribution from agriculture to the economy. So favourable conditions for agriculture and economy are expected this year as well,'' Ramesh said.

Some global forecasters had raised an alarm that El Nino may disrupt the Indian monsoon, but IMD said the worries were premature. Another phenomenon called the Indian Ocean Dipole, also referred to as the Indian Nino, could counter El Nino because of favourable temperature changes in the Indian Ocean, meteorologists said.

The weather office said there is a 38 per cent chance of rainfall being closer to 100 per cent of the average or more. It said there is a 50 per cent chance of a weak El Nino forming towards August- September.

This concurs with the global estimates of El Nino developing in the later part of this year.

The El Nino phenomenon refers to the warming of the equatorial Pacific, releasing heat and moisture in the air and affecting global wind flows, which in turn often weakens the monsoon rain. Last year, the reverse phenomenon called La Nina prevailed although it was weak.

''Globally, La Nina conditions are still persisting in the Pacific. Sea surface temperatures are showing warming conditions, but atmosphere still hasn't changed. It will take time for El Nino to establish. So El Nino to occur even in the later part of monsoon is less probable compared to earlier,'' D S Pai, director for long range forecast at IMD, said.