The monsoon is currently active across many regions in India, and the India Meteorological Department (IMD) expects heavy to very heavy rainfall over the next 5–7 days, with isolated areas likely to receive extremely heavy showers. A robust monsoon not only supports agricultural output but also contributes to the broader economy. However, the key question is: does the monsoon significantly influence the stock market? Specifically, does rainfall in July and August matter more for market performance than the entire monsoon season?
Let’s explore this relationship to understand whether rainfall during these peak months really impacts Indian equity returns.
Monsoon Prediction by IMD
The IMD has forecasted widespread rainfall across several parts of the country until July 17. Regions like the National Capital Region, Central India, and Northwest India are likely to witness heavy to very heavy rainfall. Strong showers are also expected in East Rajasthan, Uttarakhand, Himachal Pradesh, Jammu and Kashmir, and both eastern and western parts of Uttar Pradesh.
In Northeast India, light to moderate rain with thunderstorms and lightning is forecasted through the week. Meanwhile, southern states such as Coastal Karnataka, Kerala, South Interior Karnataka, and Tamil Nadu may experience isolated spells of heavy rain in the coming days.
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Why Monsoon Matters in India
Agricultural Dependence: Nearly 70% of India’s annual rainfall comes from the monsoon, and around 60% of farmland is rain-fed. In areas lacking irrigation, farmers rely heavily on timely and adequate rainfall to cultivate crops like rice, pulses, and oilseeds. These crops directly impact the country’s agricultural GDP.
Economic Impact: A good monsoon leads to higher farm output and helps stabilise food prices, contributing to lower inflation. This, in turn, influences the Reserve Bank of India’s monetary policy. As per The Hindu BusinessLine, agricultural GDP grows by around 3.8% in years with good rainfall, while in drought years, it contracts to nearly 1.2%.
Rural Consumption and Livelihoods: Rural income and spending are closely linked to monsoon performance. Since rural demand accounts for nearly half of India’s household consumption, a healthy monsoon season typically results in higher income levels and increased demand for goods.
Inflation Control: Adequate rainfall ensures a stable supply of agricultural commodities, keeping food prices in check. On the other hand, poor rainfall can lead to reduced yields and price spikes — as seen in essentials like onions.
Water Resources and Power Supply: The monsoon replenishes reservoirs and groundwater sources, essential for both drinking water and irrigation. It also supports hydropower generation, impacting electricity supply and costs for industries.
Exports and Trade Balance: India is one of the world’s leading rice exporters. A favourable monsoon supports production, enabling higher agricultural exports and improving the country’s trade balance.
Monsoon and Market Returns
From June to September, the Indian stock market’s performance — particularly the Sensex — doesn’t show a strong correlation with monsoon trends. Consider these examples:
Above-normal Rainfall: In 2019, 2020, 2022, and 2024, the Sensex delivered positive returns in three out of four years (2020, 2022, and 2024). In 2019, despite above-average rainfall, the market declined.
Below-normal Rainfall: In 2016, 2017, 2018, and 2023, Sensex returns were modestly positive, showing the market’s resilience even during weaker monsoons.
When examining the third quarter (October to December), there’s again no consistent relationship with the monsoon classification. For instance, even in strong monsoon years, Q3 returns were mixed.
Conversely, weak monsoon years like 2017 and 2023 saw solid post-monsoon gains — highlighting that stock returns are largely influenced by broader factors like earnings, festival spending, and global trends.
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Sector-Specific Impact
Markets are forward-looking and tend to price in expectations — monsoon being one of them. Indices like Nifty50 and Sensex cover a broad range of sectors. However, certain sectors such as FMCG and auto, which have a high rural exposure, are more directly affected by monsoon trends.
A favourable monsoon boosts rural demand, benefitting companies in these sectors. Here’s a look at how the BSE FMCG and BSE Auto indices performed in different monsoon years:
Between June and September, the FMCG index posted gains in every normal and above-normal monsoon year, with strong performances in 2022 (14.22%) and 2024 (21.81%). In below-normal years, results were mixed, ranging from -3.30% to 5.17%. Post-monsoon (December quarter) returns, however, were largely negative or inconsistent — even after good monsoon seasons.
The auto index recorded gains in 3 out of 4 above-normal monsoon years, peaking at 26.83% in 2020. The only exception was 2019. Performance during below-normal years was mixed, while December quarter returns showed no clear pattern, irrespective of monsoon strength.
What Does This Mean for Investors?
A favourable monsoon tends to improve rural income and fuel demand for FMCG and auto products — potentially leading to short-term sectoral gains. Historical data suggests these sectors often benefit during good rainfall years, especially in the June–September period. However, broader market indices like the Sensex don’t follow the same pattern, highlighting that monsoon alone doesn’t dictate market direction.
For investors, monsoon updates can serve as a helpful near-term indicator but should be used in conjunction with other factors like earnings growth, macroeconomic trends, and valuation levels.
What’s Next?
India’s economic indicators remain strong, with rising GDP and record-high GST collections. On the global front, India has been excluded from the US’s latest tariff hikes, and trade discussions between the two countries are nearing finalisation — adding to market optimism.
While the Nifty and Bank Nifty have shown limited movement, broader markets remain active with sectoral rotation. A rebound in urban FMCG sales after a prolonged slowdown is another encouraging sign. According to Bizom data, urban FMCG sales grew faster than rural sales for the first time in six quarters — hinting at an early recovery in demand.
*The article is for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
