India sure lives in its villages.

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As demand from urban markets begins to taper following the incessant rate hikes by the Reserve Bank of India (RBI), it is the rural areas the companies have started betting on. Aiding such hope are expectations of good rainfall this season, leading to an excellent kharif crop and thereby, enhanced cash flow in the rural and semi-urban areas.

The RBI has increased the repo rate by a whopping 325 basis points over the past 17 months.

“The recent spell of good August rains is thankfully watering a sowing recovery. We continue to expect agriculture to post 2% growth — atop FY11’s 6.6%,” Indranil Sen Gupta from Bank of America Merrill Lynch said in a report.

The monsoon has been pouring at 99% of the normal as against the Met prediction of 95%. August has seen above-normal rains — much higher than the Met’s 90-94% projection — boosting hopes of a bountiful kharif crop further.

Still, can rural markets offset the slump in urban demand?

Experts feel it can, to a significant extent. Unlike in 1998, 2001 and 2008, the game changer this downturn will be a good harvest, they feel.

“Things like a capital market which create negative sentiments during a slowing economy have negligible presence in the rural markets. Add to that the good rainfall and crop expectations, rural market demand can definitely exceed the urban,” said Samiran Chakraborty, chief economist, Standard Chartered Bank.

Sen Gupta, too, feels a spike in rural demand will cushion the fall in margins and help industries recover, if not completely offset the erosion in urban demand.    

The cash surplus in rural areas has historically gone into three major sectors —- automobiles, consumer durables and fast moving consumer goods. This has the corporates in these segments excited all the more.

“We are expecting a growth of 15% this year from the rural sector. Good monsoon is one of the key indicators for the growth ahead. Other factors that augur well for rural demand are government thrust to agri credit, farm mechanisation, infrastructure development and increasing use of tractors for non-farming applications, etc,” said Sanjeev Goyle, senior vice-president, marketing and Applitrac, Mahindra and Mahindra.

Among others, Maruti Suzuki India has also put special emphasis on tapping demand in the rural segment.

The consumer durables industry has been hit by high raw material costs for nearly a year and urban demand has remained below expectations, particularly in air-conditioners. Companies believe rural India is capable of lifting sales.

For durables makers, the success of festive season sales efforts will depend on employee bonuses in the urban markets and a good harvest in the rural ones, feels YV Verma, president, Consumer Electronics and Appliances Manufacturers Association and chief operating officer, LG Electronics.

For fast moving consumer goods makers, on the other hand, growth in rural sales is already notches above that in major cities. Dabur India, for one, derives 50% of its revenues from rural India, while for Hindustan Unilever, the proportion is around 40% and growing. The likes of Godrej Consumer Products, Marico and Emami also derive 25-35% of their sales from rural India.

“Though demand from both urban and rural markets has been impacted in the first half (this fiscal), especially in consumer durables and automobiles, a bumper crop will mean rural India will help companies have a strong second half. And companies with larger exposure to rural India, such as Hindustan Unilever and Dabur will benefit the most,” said an analyst with a leading brokerage in Mumbai, requesting anonymity.