Are Rains Affecting Your Fund Returns? 

Is monsoon your favourite season? 

Love tea and snacks?

The monsoon season holds an almost mythical status in India, often considered the lifeblood of its economy. 

For millions, particularly in rural areas, the timely arrival and generous distribution of the monsoons signal hope for prosperity. 

As an investor, you might naturally wonder: are the rains directly influencing your mutual fund returns? 

While conventional wisdom often links a good monsoon season to a booming stock market, historical data from the past two decades reveals a more nuanced and complex relationship. 

 

 

Let us learn about the importance of the monsoons for India’s economy, analyse their actual correlation with market performance, and shed light on why other factors often play a more decisive role in your fund’s returns.

 

The Monsoon & India’s Natural Economic Stimulus

 

The southwest monsoon season is indeed the lifeblood of Indian agriculture, especially critical for the Kharif season, during which staple crops like rice, pulses, cotton, and maize are sown. A timely and robust onset allows for early sowing, facilitates better crop planning, and leads to higher yields, significantly reducing reliance on groundwater for irrigation. It also helps mitigate the risks posed by erratic late-season rainfall, which frequently damages maturing crops.

The India Meteorological Department (IMD) recently forecast an early onset of the southwest monsoon over Kerala on May 27, 2025, a full five days ahead of the normal onset date of June 1. With a model error margin of four days, this early arrival might appear as just a climatological update to the casual observer. However, for millions of Indians, especially farmers and rural households, this forecast signals renewed economic hope. 

The early onset of the monsoons and the projection for above-normal rainfall during the June to September period are being closely watched by economists, policymakers, and industry leaders. This development gains particular significance at a time when rural consumption has faced stress, and the broader economy seeks growth engines beyond urban consumption and industrial output.

India, often referred to as a land of agriculture, maintains a deep-rooted agricultural tradition and remains one of the world’s top producers of food grains. The agricultural sector continues to be a cornerstone of the Indian economy. More than 40% of India’s workforce finds employment in agriculture, and nearly 46% of domestic demand originates from rural areas. This means a strong monsoon season does not merely improve food output; it revitalizes rural demand for goods, services, housing, and transportation, setting off a positive multiplier effect across the entire economy. 

As per FY 2023 data, agriculture still tops the list of employment providers across all major sectors, reflecting its enduring relevance in a rapidly modernising economy. A large section of India’s population, particularly in rural areas, depends directly on farming for their livelihood.

In 2024, India recorded an impressive 108% of the Long Period Average (LPA) rainfall, 934.8 mm compared to the average of 868.6 mm, marking the highest rainfall in four years. 

This helped farmers sow more crops and supported broader rural economic activity. For 2025, the IMD projects above-normal seasonal rainfall, estimating it to be 105% of the LPA (87 cm), with a 59% probability of rainfall being either above normal (33%) or in excess (26%).

 

A Nuanced Relationship of Monsoon Rainfall & Stock Market Returns

 

While a strong monsoon season is generally perceived as positive for agriculture and, by extension, rural consumption and the broader economy, market performance data over the past two decades tells a more nuanced story. 

There is often a disconnect between the quantum of rainfall and the overall stock market returns.

 

Let us look at some historical examples of Sensex returns versus actual rainfall:

 

Year	Actual Rainfall (vs. LPA)	Sensex Returns
2002	Deficient (<90%)	3.50%
2004	Below Normal (90-95%)	13.10%
2009	Deficient (<90%)	81%
2011	Above Normal (>100%)	-25%
2014	Deficient (<90%)	25.70%
2015	Deficient (<90%)	-5%
2016	Below Normal (90-95%)	2%
2018	Below Normal (90-95%)	6%

 

These instances show that while monsoons significantly influence certain sectors, they are rarely the sole determinant of overall market direction. For example, in 2009, despite receiving only 78% of the LPA, a significantly deficient monsoon, the S&P BSE Sensex soared by 81%, recovering sharply from the global financial crisis. 

Similarly, in 2014, rainfall was just 88% of LPA, yet the Sensex climbed 30%, buoyed by a historic political shift as the Modi government came to power with a strong mandate, boosting investor sentiment. Conversely, 2016 saw a nearly normal monsoon at 97% of LPA, but the market barely moved, posting just a 1.95% return, largely due to the major economic disruption caused by demonetisation. Even in 2011, which received 102% of LPA (technically excess rainfall), the Sensex fell by 25%, reflecting global and domestic economic concerns that overshadowed favorable weather.

 

An analysis of Nifty returns specifically during the monsoon season (June to September) from 2013 to 2023 further highlights this lack of consistent relationship:

 

Year	Actual Rainfall (vs. LPA)	NIFTY Returns (June-Sep)
2013	Above Normal	-4.20%
2014	Deficient	10.20%
2015	Deficient	-5.80%
2016	Below Normal	5.50%
2017	Below Normal	1.70%
2018	Below Normal	1.80%
2019	Above Normal	-3.80%
2020	Above Normal	17.40%
2021	Below Normal	13.10%
2022	Below Normal	3.10%
2023	Below Normal	5.62%

 

Over this 11-year period, 8 years experienced below-normal or deficient rainfall, yet 6 of those years still recorded positive Nifty returns. Conversely, 3 years had above-normal rainfall, but 2 of them saw market declines. 

This indicates that while monsoons remain crucial for agriculture and rural consumption, broader macroeconomic factors, investor sentiment, and policy actions often drive market returns more significantly than rainfall alone. 

Quantitatively, studies have found a weak or even mildly negative correlation between monsoon rainfall and calendar-year Sensex returns, suggesting limited direct dependence.

 

Why the Correlation Between Monsoon and Markets is Weakening

 

Several factors explain this evolving disconnect:

 

1. Declining Agricultural GDP Share

 

Agriculture’s contribution to India’s GDP has steadily fallen from approximately 25% in the 1990s to about 18% in recent years. While the monsoon season still critically affects farmers and certain industries, the overall economy is far more diversified now. Dominant sectors in stock market indices, such as services and manufacturing, are less directly dependent on rainfall. This dilution means a poor monsoon today has a smaller aggregate impact on corporate earnings compared to decades ago.

 

2. Policy and Irrigation Buffers

 

India has significantly improved its food grain buffer stocks, expanded irrigation coverage, and developed better contingency plans for droughts. Government policy responses (e.g., subsidies, rural employment programs, monetary easing in drought years) often mitigate the economic damage of a weak monsoon season. Better irrigation infrastructure and technology adoption have notably reduced the impact of monsoon shocks on both agriculture and the stock market.

 

3. Market Anticipation and Global Factors

 

The stock market is inherently forward-looking, absorbing a multitude of news and expectations. Often, by the time the actual monsoon’s outcome becomes clear (by August/September), the market may have already priced in expectations or shifted its focus to other prevailing issues (e.g., global recessions, crude oil prices, election outcomes). For instance, in 2009 and 2014, strong bullish market momentum from global and local factors easily outweighed the negative impact of deficient rains. Conversely, in a year like 2011, despite adequate rains, the market was overwhelmed by global risk-off sentiment.

 

4. Short-term Sectoral Rotation

 

While broad indices may not show a strong net effect, certain monsoon-sensitive sectors do react to rainfall variability. Agriculture-allied sectors (e.g., tractors, seeds, fertilisers), fast-moving consumer goods (FMCGs) with large rural sales, and automotive segments (e.g., two-wheelers, entry-level cars) often experience a boost from a good monsoon or face headwinds during a poor one. However, these micro-level impacts can cancel out at the index level, as diversified indices also include sectors like IT, pharma, and oil & gas, which are largely monsoon-agnostic.

 

Impact of Monsoon on Inflation

 

Historically, the monsoon season played a critical role in determining food prices, given agriculture’s reliance on rain. However, recent analysis suggests that the monsoon’s direct influence on key economic indicators like inflation, especially in the short term, may be less significant than traditionally believed. Despite erratic rainfall between financial years 2017 and 2019, India’s foodgrain production continued to rise. 

This trend highlights the growing resilience of the agricultural sector, largely attributable to expanded irrigation infrastructure. 

The Reserve Bank of India (RBI) has also noted that improved irrigation has helped India become more food-secure and less reliant on monsoon patterns.

The weakening link between monsoons and broader economic trends also stems from agriculture’s declining dominance in the rural economy. Agriculture now contributes only about 18% to India’s GDP and roughly a quarter of the rural economic output, signaling a structural shift that buffers the economy from monsoon volatility. In essence, while monsoons remain important, India’s economy is progressively becoming more resilient to their unpredictability.

 

Sectors Most Impacted by the Indian Monsoon

 

Despite the broader weakening correlation, certain sectors remain more sensitive to the monsoon season:

 

1. Agriculture

Still contributing around 18% to India’s Gross Value Added (GVA), agriculture remains heavily dependent on rainfall, especially for Kharif crops. A poor monsoon can lead to reduced yields, higher food inflation, and stressed rural incomes.

 

2. FMCG

This sector is closely tied to rural demand and agricultural output. Weak rural income often leads to lower discretionary spending on FMCG products.

 

3. Automotive

Rural income significantly drives demand for two-wheelers and tractors, making these segments highly sensitive to monsoon outcomes. A good monsoon raises disposable income, boosting auto sales.

 

4. Banking and Rural Finance

The financial sector, particularly rural banking, experiences cyclical changes tied to rainfall. Good monsoons lead to higher farm incomes and increased savings, sustaining the rural credit cycle.

 

5. Power and Renewable Energy

Hydroelectric generation relies directly on monsoon-fed water bodies, replenishing reservoirs. Wind energy, another renewable source, also sees peak production during monsoon season.

 

Markets React to More Than Just Weather

 

• The monsoon predictions deservedly capture news cycles and are vital for specific sectors. 
• However, the overall market movements are largely driven by a multitude of broader macroeconomic, political, and global cues. 
• Structural reforms, fiscal policies, global market trends, geopolitical tensions, and monetary policy decisions typically play a more decisive role than whether it rains 90% or 105% of the average. 

 

 

Wrapping Up

 

Normal monsoon forecasts may offer some reassurance to the markets, particularly for companies with significant rural exposure. However, investors should exercise caution in equating rainfall data with direct, predictable market outcomes. Historical patterns strongly suggest that monsoons alone are poor predictors of annual stock market returns. Instead, it is the complex interaction of policy, global trends, and diverse economic developments that truly moves the needle of the Indian stock market.

 

 

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