Dry Patch Ahead for Nifty as Rain Gods Fail to Smile

In five of the seven years of deficit rains, Nifty fell during the last two weeks of July, says a study     The Nifty, already suffering its worst July in a decade, could slip further by mid-August, if an analysis of data linking index movements and monsoon-deficient periods in the past 22 years is any indication.  Between 1990 and 2011, monsoon has been officially classified as deficient on 13 occasions. The toughest seven years during this period saw the monsoon falling short by between 6.7% and 21.8%, meteorological department data shows.  In five of the seven years that the rain gods failed to deliver, the 50-share Nifty index fell during the last two weeks of July, with the selling abating only after the second week of August, a study of seasonal charts shows.  This time around, a weak monsoon season comes at a time of high domestic political uncertainty, paralysis of sorts in decision-making, a slowing economy and global economic problems.  "Given the lack of monsoon and other negatives, the Nifty is likely to retest the lower end of the 4,700-5,600 zone in the August-September time frame," says trader and fund manager Ashwani Gujral. "Deficient rains sentimentally impact a weak market much more adversely than otherwise. There is a negative bias for the market for next one month.'"  So far this year, monsoon has severely underperformed the average — the first time since 2009, a year that was officially labeled a drought year. As of July 24, the monsoon is 22% below the 50-year average, according to the Met Department.  Even though agriculture's share in the overall economy has fallen over the years, it is still an important factor in the health of the rural economy and can impact growth in earnings of companies with a high degree of sensitivity to the rural economy. Companies such as Hero MotorCorp, Mahindra & Mahindra and HUL have their fortunes tied to a plentiful monsoon, which drives up rural incomes and, with it the consumption of their products.  "If rains falter, rural incomes could weaken, with risk to rural consumption," Morgan Stanley said in a note advising clients to avoid stocks of companies with higher rural exposure.  The effect of a truncated monsoon is severe on the Nifty too. The shortfall in rains stood at 7.8% in 2000, triggering a five-week fall on the index. It again slumped for four continuous weeks in 2002 when the rain deficit was 19.2 percent. The weekly drops in the Nifty-50 have ranged from falls between 0.3% and 8.1% for the four weeks from mid-July to mid-August in the 13 rain deficient years since 1990. The only aberration was in 2009, when the global financial system was in the grips of a bull run, recovering from the depths it had touched during the market meltdown of the previous year. Similarly, in the years when rains were abundant, the Nifty began a sustained upturn from the third week of July, showing a strong co-relation between Nifty and monsoon season. On Wednesday, the Nifty closed 0.4% lower at 5,110 points. The index has had its worst July so far since 2002, and has dropped 10% from its February 22 peak.