History in Modi's favour: Why Sensex will ignore poor rains, continue to rally

Advancement of monsoon has halted and is not expected to revive until the first week of July. While this spells gloom for the economy since it may cause a drop in agricultural output and push up inflation, the stock markets have largely remained unaffected.

In fact, historical data shows that in the past when India witnessed a drought-like situation in 2004 and 2009, the Sensex and Nifty actually performed well. As Firstbiz pointed out earlier , equity markets moved up on factors such as pick up in global economic growth and election (2004 and 2009) rather than on monsoons.

For instance in 2004, monsoon was 13.8 percent below the average, but the Sensex closed 13 percent higher than the level at the start of the year.

Similarly, in 2009, India witnessed arainfall deficiency of 21.76 percent but the Sensex rose 77 percent, thus leading to a massive bull run.

Although this is just a set of two data points, it is enough to point out that markets do not necessarily crash in periods of low rainfall. This is because the market is more concerned about the new government coming to power in an election year and the kind of reforms it can usher in to revive growth and fast-track investment.

Today’s movements in the Sensex and Nifty are a case in point. At 12:51 pm, the Sensex is at 25379, up 279 points points and the Nifty at 7596, up 97 points. This surge has happened despite the subdued cues from the global markets, indicating that it may be the start of a pre-Budget rally in equities.

Moreover, even though rainfallin the country has made marginal progress as compared with last week (It received 74.4 mm of rainfall from June 1 to June 25, as compared to normal precipitation of 124.5 mm, which is 40 percent less than that what was expected in its first spell,) water reservoir levels are higher than average and India has buffer stocks that would cover any food shortages. ( Read more on that here) .