Weak monsoon emerges as India's next economic problem after crude oil

A weak monsoon is emerging as India’s next inflation risk, with a developing El Niño threatening to curb rainfall and push up food prices just as an easing oil relieves broader price pressures.

The southwest monsoon, which accounts for about 70% of India’s annual rainfall, is vital for the $300 billion farm economy and has an outsized influence on food prices, rural demand and broader economic output.

“Bad rains bring bad sentiment, both in equity markets and rural spending,” said Rajni Thakur, an economist at L&T Finance Ltd., which runs a rural loan book of over 450 billion rupees ($4.8 billion). “First comes inflation, then sentiment is hit, which leads to a cut in spending during the festive season.”

Reserve Bank of India officials have said they are closely monitoring the weather to assess the inflation outlook and stand ready to respond if price pressures broaden. The RBI left its key rate at 5.25% this month while maintaining a neutral stance with inflation comfortably within its 2-6% target range.

A 10% rain deficit could add as much as one-percentage-point to headline consumer inflation driven by food prices, according to research by Yuvika Singhal, an economist at QuantEco Research. India’s cumulative rainfall was 43% below normal as of June 22.

In rural India, a delayed monsoon — which typically runs from June 1 to Sept. 30 — rarely shows up first in official data. It appears instead in smaller fertilizer purchases, postponed tractor bookings, fewer motorcycle inquiries and shopkeepers holding back inventory before festive season which kicks off in September.

The weakness then spreads beyond villages, weighing on broader consumption and growth.

One cushion is India’s ample grain inventories.

In an interview this week, external member of the RBI’s monetary policy committee Nagesh Kumar sought to calm nerves about weaker rainfall this year, saying agriculture has become less weather-dependent over time and that ample grain stocks provide a buffer against shortages.

On Wednesday, RBI Governor Sanjay Malhotra too highlighted India’s stockpile as a potential buffer.

Economists, however, caution that stockpiles can only partially offset a sustained weather-related hit to production.

“That buffer stock is for rice and wheat and not for pulses, oilseeds, coarse cereals,” said Madan Sabnavis, chief economist at Bank of Baroda.

“El Niño is a major concern not just for India, but for the entire world,” he said. “We should not be in a state of denial. We import edible oils from Southeast Asia. Lack of rains will impact even those.”

A delayed monsoon also risks extending into late September and October, disrupting harvest and damaging crops.

Sabnavis expects headline inflation to top 5.5% by October, near the upper ceiling of the central bank’s target band, driven by food prices. Such an outcome could prompt the RBI to hike, marking its first increase since February 2023.

The government is trying to mitigate the impact by identifying 315 districts vulnerable to below-normal rainfall, including 111 high-priority areas with limited irrigation. Contingency plans will guide crop choices, water use and emergency measures across major agricultural states. The government is also stepping up coordination with states to protect crop production and rural incomes if dry conditions persist.

In 2023, a delayed monsoon and below-normal rainfall prompted New Delhi to curb rice exports in a bid to contain domestic prices, disrupting a market that relies on India for about 40% of global rice shipments. So far this year, there have been no signs of similar restrictions.