El Nino and price hike is expected to weigh on the rural demand in FY27 but FMCG firms may still benefit. According to UBS, rural economic momentum strengthened in Q1FY27 and continued to outperform urban activity. However, UBS believes that the current pace of growth cannot be sustained throughout FY27.
“Weather-related risks remain elevated, with uneven monsoon activity potentially weighing on agricultural output and farm incomes in the coming quarters,” UBS noted.
Rural demand likely to stay resilient in FY27
Weather-related risks continue to remain elevated. Uneven monsoon activity could potentially affect agricultural output and farm incomes in the coming quarters.
UBS said, a sharp slowdown in rural demand appears to be unlikely. It expects stronger household balance sheets, continued government spending and welfare transfers, and supportive credit conditions should help cushion rural incomes and provide a buffer to demand.
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“Overall, we expect rural demand to remain more resilient than in previous episodes of monsoon-related stress, even as growth moderates from current levels,” UBS added.
Better rainfall in July, Kharif sowing recovery ease El Niño concerns
Another reason why UBS thinks rural demand may remain resilient despite strengthening El Nino conditions is the improvement in rainfall in July and August so far. The monsoons had a weak start in June, but rainfall improved in July and remained supportive through early August. This has reduced concerns around agricultural output.
Improved rainfall has also helped kharif sowing recover. The decline in total kharif acreage narrowed from around 21% year-on-year in early July to less than 2% by the first week of August.
A positive Indian Ocean Dipole (IOD) could partly offset this impact, according to UBS. Water reservoir levels are also close to normal, providing additional support to agriculture.
IOD is a climate pattern that describes the difference in sea-surface temperatures between the western and eastern parts of the Indian Ocean. Positive IOD means the western Indian Ocean, near Africa, becomes warmer than normal, while the eastern Indian Ocean, near Indonesia, becomes cooler than normal.
UBS expects policy measures promoting crop diversification, short-duration and climate-resilient crop varieties, along with wider irrigation coverage, to help reduce the impact of uneven rainfall.
Reasons why rural demand strengthened in Q1FY27
India’s rural demand has strengthened in the June quarter primarily supported by four factors — farm income, wage income, government transfers and access to credit.
UBS also pointed out that this EL Nino is being followed after two consecutive good monsoon/crop years, improving farm cash flows. This have benefited Rural households.
“Despite El Niño-related concerns, improved farm cash flows (from the previous two good monsoon years), government welfare transfers, GST-related benefits and strong credit growth likely enhanced rural household purchasing power and sustained consumption growth,” UBS noted.
Apart from this, government welfare transfers, GST-related benefits and strong credit growth have also helped support consumption.
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State governments have implemented large cash transfer schemes worth around $20 billion, while continued welfare spending and public investment in rural infrastructure are expected to provide further support to rural incomes.
The new VB-GRAM-G rural employment scheme, which came into effect on July 1 and replaced MGNREGA, could provide another buffer to rural incomes. However, UBS said it is too early to assess its broader economic impact.
UBS picks in FMCG, autos and NBFCs
UBS’ Rural Economic Indicator (REI) suggests that the improvement in rural economic activity is broad-based. The recovery is visible across consumer staples, discretionary consumption and agriculture-linked sectors. However, growth could moderate from current levels.
Higher food prices can be a problem and a solution simultaneously. While they can help improve income for agricultural producers, they can also reduce the real purchasing power of rural households.
UBS pointed out that, several companies have also raised their FY27 volume growth guidance, citing strong demand from rural markets. The international brokerage house expects most FMCG companies to benefit from the improvement in rural consumption. Its preferred picks in the sector are Britannia Industries and Hindustan Unilever. In the automobile sector, UBS favours M&M and Eicher Motors. The brokerage also expects NBFCs with significant rural exposure, like Chola and Shriram to benefit from resilient rural demand.
Disclaimer: The stock picks and brokerage views cited in this article are provided strictly for informational and educational purposes and do not constitute financial advice, an offer, or a solicitation to buy, sell, or hold any security. Investments in the securities market are subject to market risks, and past performance or analyst projections are not indicative of future returns. Readers should conduct their own independent research and consult a qualified, SEBI-registered financial advisor before making any investment decisions.
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