India's monsoon rainfall in the crucial crop planting month of July has been close to normal, recovering sharply from a 16% deficit in June. In the 4 month monsoon season (June-September) July is normally the wettest and accounts for about a third of the rainfall. Mr Ajit Tyagi, director general of the India Meteorological Department, expects rains to increase in the next two months due to the La Nina effect and produce an overall rainfall of 102% of the 50-year average for this season. La Nina causes wetter-than-normal rain conditions in Asia and drier weather in the Americas. Mr Tyagi's predictions will be followed with keen interest this year after last year's failed monsoons caused the worst drought in 37 years and badly hit farm income due to much lower agricultural output. The drought and lower crop production sharply pushed up food prices and raised inflation, which in turn pushed interest rates higher. However, despite the worst drought since 1972, the economy grew 7.4% to March 2010, up from 6.7% a year earlier.

David Fuller's view An important question for investors is: Will a better crop cycle following India's current monsoon lower food prices sufficiently in the months ahead to prevent interest rates from rising to the point where they topple the stock market?

Probably, although the India's government will be far more concerned about maintaining GDP growth than propping up the stock market. Fortunately, both generally respond to the same accommodative monetary policies. India's central bank knows that some of the current inflation is due to recently reduced subsidies for petroleum products. Also, a good monsoon is all but assured and this will lower food price inflation in the months ahead.

Currently, India's stock market is temporarily overbought, as are most stock markets around the world. However if the Sensex Index (weekly & daily) can hold above its small reaction low near 17,380 during a consolidation, we should see additional gains in coming months.