India faces rising inflation risks as a potential strong El Niño event threatens to weaken the 2026 southwest monsoon, according to DBS Group Research. The monsoon, which delivers about 70 per cent of the country’s annual rainfall, is central to agricultural output and food price stability.
The Indian Meteorological Department (IMD) has projected rainfall at 8 per cent below the long-period average (LPA), with a 66 per cent probability of below-normal or deficient rains. Private forecaster Skymet has estimated rainfall at 94 per cent of LPA.
DBS said El Niño conditions typically weaken rainfall across Asia-Pacific and can raise the risk of drought in some regions, although a positive Indian Ocean Dipole could partially offset the impact.
DBS has revised its FY27 inflation forecast to 4.9 per cent year-on-year, citing risks from monsoon shortfalls, elevated energy prices and rising fertiliser costs. Inflation is expected to ease to 4 per cent the following year.
The report noted that wholesale price inflation is likely to rise faster than retail inflation due to higher commodity and import costs, alongside mounting input price pressures seen in business surveys.
“Passthrough to rain-sensitive crops, nonetheless, pose upside risks to our inflation forecast,” DBS said in its report titled India: El Niño’s rain check.
Agriculture Exposure High Despite Modest GDP Share
Agriculture accounts for around 16–17 per cent of India’s GDP but supports nearly half of total employment, making it highly sensitive to rainfall patterns.
DBS said that only a significant rainfall shortfall tends to materially affect output. In past episodes such as 2014–2016, monsoon rainfall was 12–13 per cent below LPA, leading to weaker foodgrain output and slower agricultural growth.
The report estimated that a double-digit rainfall deficit could reduce overall GDP growth by 20–30 basis points if agricultural growth slows from 3.5 per cent to around 2 per cent.
DBS highlighted that rising irrigation coverage has reduced dependence on rain-fed agriculture, helping cushion output risks from weaker monsoons.
Food security buffers also remain strong. Central foodgrain stocks held by the Food Corporation of India exceeded 60 million metric tonnes in May 2026, nearly three times required buffer norms, including 38.6 million tonnes of rice and 21.8 million tonnes of wheat.
These inventories can help stabilise prices, particularly for staples, even if rainfall underperforms, the report said.
Perishables And Imports Remain Key Vulnerabilities
Despite strong buffer stocks, DBS warned that price pressures could persist in segments where storage is limited, such as vegetables, pulses and oilseeds.
In past episodes, authorities have relied on imports, export restrictions and distribution measures to manage shortages and contain inflation spikes.
Reservoir and groundwater levels are currently higher than a year ago, offering some short-term support for crop production. However, prolonged monsoon weakness could affect subsequent cropping cycles.
DBS said the Reserve Bank of India is unlikely to respond aggressively to supply-side inflation shocks driven by food and energy prices.
The central bank is expected to keep policy rates unchanged through 2026 unless inflation expectations rise sharply and spill over into core inflation.
The report added that policymakers may focus on managing liquidity and external stability, including measures to attract foreign inflows and support the rupee.
DBS noted that options under consideration include foreign currency bond issuance by state-owned banks and special deposit schemes for non-resident investors. |
