Rain is not the only concern for the market

The threat of El Nino is looming this year. Against this backdrop, how the monsoon pans out will be closely watched. It also matters that the timing of monsoon arrival and spatial distribution are important to reservoir levels.

There are many effects of less rainfall. This could potentially hurt agricultural production, which could translate into lower farm incomes and hurt rural demand. Then, companies in the automobile, consumer durable and FMCG sectors, which have performed well in rural markets, may face trouble.

Meanwhile, the impact of normal or below-normal monsoons on food inflation has not been very clear in the past (see chart). That said, the trajectory of monsoon cannot be ignored from the perspective of food inflation.

“The link to food inflation, however, is not immediate. In the past, food inflation has risen despite good rains and vice versa, said an April 11 report by Nomura Global Markets Research, suggesting that there are several other factors that determine the outlook for food inflation. In March, inflation was measured through consumer prices. The index stood at 5.66% versus 6.44% in February. The latest reading is below the Reserve Bank of India’s (RBI) upper tolerance band of 6%.

As inflation eases, there could be more noise for a rate cut by the RBI. But there is still some time left in this. Now, investors will focus on the March quarter (Q4FY23) results. Lower commodity prices are a relief for many firms, but there could be demand-led challenges in FY24.

Rural demand growth has been below expectations. According to Kunal Vora, head of Indian equity research at BNP Paribas, management commentary from FMCG companies has not been encouraging for a recovery in rural demand and remains a concern for the sector. “Revenue growth is looking good right now because of price hikes by companies. However, due to lower base effect and price cuts in some categories, FMCG companies may see a deceleration in revenue growth and the impact should start showing from the second half of FY2024.

Besides, the earnings outlook for banking, financial services and insurance companies looks bleak going forward. System credit growth is expected to decelerate and net interest margins of banks are expected to come under pressure.

Furthermore, turmoil in the US and European banking sectors added to concerns about already sluggish global growth. Hence, the revenue of Indian IT services firms may get affected.

Global macro conditions are still challenging. On Tuesday, the International Monetary Fund slashed its global growth forecast for 2023, citing a broad-based and faster-than-expected recession amid high inflation. It cut its FY24 India GDP growth forecast by 20 basis points to 5.9%.

Given India’s relatively stable macros, it is said to be better positioned than many Asian peers. But the evaluations are demanding. The MSCI India Index is trading at a one-year forward price-to-earnings multiple of 20.46x, a premium to the MSCI Asia ex-Japan and MSCI Emerging Markets indexes, Bloomberg data showed. Moreover, in the pre-election year, the mood among investors turns jittery.

Vora said investors will now focus on whether the US Federal Reserve has stopped its rate hike spree and how inflation and corporate earnings fare in India.