After a period of relative stability, India is now facing potential inflationary pressures that could be exacerbated by unfavorable weather conditions. The India Meteorological Department (IMD) announced earlier this week that the monsoon is projected to reach only 92% of the Long Period Average (LPA) in 2026, following two consecutive years of abundant rainfall.
A lower-than-expected monsoon could further elevate inflation rates, which are already feeling the effects of geopolitical tensions in West Asia. Recent data revealed that the retail inflation rate in India rose to 3.4% in March, a slight increase from February’s figure of 3.21%. Notably, certain components of the Consumer Price Index (CPI) are showing significant increases due to the ongoing conflict; for example, inflation for LPG and piped natural gas surged to 5.3%, up from 1.6% in February, while airfares experienced a substantial increase of 14.2% after previously declining by 7% in February.
The conflict is influencing energy costs, while a weak monsoon could drive up food prices, thereby contributing to overall inflation.
On April 8, the Reserve Bank of India (RBI) projected that CPI inflation would average 4.6% for the fiscal year 2026-27, more than double the inflation rate reported last year. This forecast was predicated on the expectation of a normal monsoon during 2026-27 and 2027-28. However, just a week later, this fundamental assumption is now in question.
It is important to note that the correlation between rainfall and agricultural yields—and consequently food inflation—is complex. There have been instances where abundant rainfall coincided with high inflation rates, and vice versa. Soumya Kanti Ghosh, Chief Economic Adviser at the State Bank of India, commented that the current stocks of food grains are adequate to mitigate any significant disruptions in Kharif production. He pointed out that the key factors are not just the quantity of rainfall but also its distribution across time and space, with crucial forecasts expected from the IMD in May.
However, insufficient rainfall can still adversely affect agricultural output through other channels. According to the ratings agency ICRA, a below-average monsoon could hinder the replenishment of reservoir levels. As reported by the Central Water Commission, nationwide reservoir storage was at 44.7% of live capacity as of April 9, which is higher than both last year and the normal levels for this time of year.
Typically, reservoir levels decrease during the pre-monsoon period (March-May) before being replenished during the southwest monsoon (June-September). Consequently, a forecast of below-normal rainfall this year may restrict the expected replenishment of these reservoirs, as noted by ICRA.
It is also worth mentioning that the IMD’s predictions can sometimes be inaccurate. For instance, in April 2022, the department forecasted monsoon rainfall to be 99% of the LPA, yet actual rainfall reached 106%. Similar discrepancies were observed in 2019 and 2020, and the current forecast of 92% is the lowest in 25 years.
Reservoir water levels will be critical for irrigation, especially if the El Nino phenomenon adversely affects rainfall. ICRA highlighted that during the past 24 years, India has experienced El Nino conditions on eight occasions, leading to monsoon rainfall falling between 1-22% below the LPA. This variance has resulted in fluctuations in Kharif output, with declines ranging from 1.6% in 2006 to 23.3% in 2002. Furthermore, Rabi output also decreased during four of these years, including notable reductions in 2002, 2009, 2014, and 2018.
If agricultural production suffers due to insufficient rainfall, it could negatively impact farmers’ incomes, compounded by rising food prices, which may pose challenges for the rural economy that has thrived in the past two years due to favorable monsoon conditions.
So, what happens when inflationary pressures from conflict coincide with weak monsoon conditions? Economists at HSBC suggest that if El Nino proves to be moderate, CPI inflation could exceed the RBI’s upper tolerance limit of 6% if Brent crude oil prices average $100 per barrel in 2026-27. In the event of a severe El Nino, inflation could surpass 6% at an average Brent price of $90 per barrel.
The recent Brent crude oil average of $100 per barrel in March indicates a critical juncture. The direction of oil prices over the upcoming month could play a significant role in determining whether the repo rate will be adjusted, according to HSBC economists led by Pranjul Bhandari.
Siddharth Upasani serves as a Deputy Associate Editor at The Indian Express, focusing on economic data and trends. He has previously contributed to Moneycontrol and the financial newswire Informist. Outside his professional endeavors, he enjoys sports, fantasy football, and graphic novels.
