The Monsoon and Indian stock markets have a remarkable

connection. With a normal monsoon

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predicted this year, investors can expect a surge in stock prices, especially in those of staples, consumer durables and agro-related companies, according to analysts.

Not surprising, as over half the country's population still depends on agriculture for its livelihood. And rural India could be rolling in spoils, with food prices flaring up unabated globally.

Since 2001, the Bombay Stock Exchange's (BSE) Sensex has never given negative returns during June, indicating the strong correlation of the stock markets and the monsoons. A normal or better-than-normal monsoon—as predicted by the meteorological department – gives rise to higher agriculture produce, which in turn triggers higher rural income and higher spending. Also, higher prices of agro commodities could result in greater incomes.

"There is a strong sentiment connection between our markets and the monsoon. The spiraling inflation due to high food prices may be contained if we have a good monsoon," said Shahina Mukhadam of IDBI Capital Markets. According to her, the agro-based companies, food processing firms and FMCG entities will benefit from a rise in rural income. The stocks of firms such as Hindustan Unilever, ITC, Hero Honda and M&M (see bar graphs comparing their stock prices

vis-a-vis the Sensex for June-September in 2005, 2006 and 2007) are flat or somewhat down over the past month. These firms, given the sectors they operate in, are known to be sensitive to rains . One reason for their lethargy could be the choppiness in the markets. Secondly, these companies are more vulnerable to inflation because, while input costs are going up, the competitive nature of the market doesn't always allow them to pass the increased costs on to the consumers. "The current situation is an unprecedented one for Indian farmers: global prices and market forces have caused even controlled procurement prices of key crops to rise by a historic 30 per cent plus year- on-year. The regulatory structure is such that these prices could rise more even with future supply improvements. The farmers could benefit for years on the potential loss of food self-sufficiency of the country, due to rising demand. The impact on rural incomes is not yet visible because the (procurement) price hikes were implemented only recently," said Nilesh Jasani, head of research at Credit Suisse.

The rural economy normally suffers when food prices rise, as only 30-35 per cent of farmers produce surplus food. However, food prices for consumers have remained stable and should remain so, with elections less than 12-14 months away. This is facilitated through another control structure on food prices and with a historic expansion in the food subsidy bill. "While unsustainable in the longer term with implications for potential inflation in 2009, the rural economy has sizeable dual benefits from rising procurement and stagnant consumer prices in 2008," he said.Naval Kumar Bir, managing director of Standard Chartered Mutual Fund, said monsoon would boost the revenues of FMCG and auto sectors.

"Good monsoons mean higher rural income. This could boost revenues of agriculture-dependent sectors," he said.According to Credit Suisse's study, investors could get high on staples, two-wheelers, public sector banks and farm businesses to cash in on the high agriculture product prices this year.

"Rural income growth accrues to the lowest income categories. In this high-volume segment, companies with leadership in low-priced products and strong distribution should benefit the most. There are benefits also for those providing goods and services related to farm investments such as companies in seeds, crop protection, tractors and irrigation businesses. Firms in relatively high-end/less-regulated farm products such as basmati rice and edible oil are also potential gainers," Jasani said.

Though equity investors could not really benefit directly from rise in minimum support price (MSP) of wheat or rice, there are many investment themes as rural income growth and an increase in rural consumption could benefit stocks such as Hero Honda, Hindustan Unilever, ITC, State Bank of India, Punjab National Bank and mobile operators, said Credit Suisse's Jasani. K K Rathi, director (private equity), Motilal Oswal Venture Capital Advisors, said the rising aspiration of the rural population would also trigger good investment opportunities in non-banking financial companies. A good monsoon means a positive sentiment for the economy as a whole and bullish sentiment for the market, he said.

"The Indian economy is moving towards doubling itself in the next 5-7 years. As the benefits of economic progress permeates through various strata of the society, increased awareness and aspiration levels will drive credit growth in the non-urban areas of the country at a much faster pace. There is a need to shift the locus of non-urban financing away from unregulated private financiers towards the organised sector, which will boost consumption and growth in these areas without unduly burdening the borrowers through unfair business practices. Organised, regulated suppliers and

facilitators of credit are the need of the day in small towns and

villages of the country." Some of the listed NBFCs include Reliance Capital, Bajaj FinServe and Sundaram Finance. "We are bullish on the sector," he said.