Do Good Rains Bring Good Returns? Here's How Monsoon Impacts Stock Markets

India is experiencing one of its wettest monsoon seasons in over a century. According to the India Meteorological Department (IMD), the country recorded 126.7 mm of rainfall in May 2025, 106 per cent above the long-period average (LPA) of 61.4 mm. It was the wettest May since 1901.

In a consumption-driven, agriculture-reliant country like India, an above-normal monsoon forecast is often viewed as a positive economic indicator for stock markets.

"A good monsoon is a positive economic event that boosts confidence among market participants to stay invested, invest more, and increase optimism," says Vatsal Bhuva, Techincal Reasearch Analyst at LKP Securities.

"While markets often price in monsoon forecasts early, its overall impact remains a crucial driver of economic sentiment in an agriculture-led economy like India," Bhuva adds.

Which Sectors Benefit From Good Monsoon

Typically, a normal-to-above-normal monsoon augurs well for rural incomes, as it improves crop output, which subsequently eases food inflation and drives up consumption, especially in semi-urban and rural markets. This directly benefits agriculture-linked sectors such as agri-inputs, fast-moving consumer goods (FMCG), tractor-manufacturing companies, and rural and microfinance-focused non-banking finance companies (NBFCs) and banks, as it boosts rural income and demand, says Bhuva.

On the other hand, a below-normal monsoon sets a negative tone for these sectors. Bhuva explains, "Rural lending slows, agri-demand weakens, and FMCG margins may be pressured due to rising input costs. While broader market impact remains mixed, sentiment turns cautious for monsoon-dependent sectors."

Interestingly, rural demand has consistently outpaced urban consumption in the past five quarters, Bhuva highlights. That trend, when coupled with strong monsoon, tend to improve investor confidence in these sectors.

That being said, the Reserve Bank of India (RBI), too, takes a keen interest in monsoons.

How Monsoon Affects RBI Policy Outlook

Rainfall impacts food inflation. A good monsoon leads to better crop output, which in turn reduces food inflation, and vice versa. This prompts the RBI to cut interest rates in order to drive demand. Lower interest rates means lower borrowing costs, which encourages consumers to increase their spending, therefore, driving demand in the economy higher.

The RBI's monetary policy committee (MPC) has already cut interest rates thrice this calendar year – 25 basis points (bps) in February, another 25 bps cut in April, and a 50 bps cut in June.

Bhuva affirms, "A good monsoon supports strong agricultural output, keeping food inflation in check and giving the RBI more flexibility to cut rates or maintain an accommodative stance. Conversely, poor rainfall can drive food inflation higher, prompting the RBI to hold or tighten rates to manage price stability."