After war, rain: Below-average monsoon emerges as new inflation risk

While the war is impacting energy prices, a weak monsoon could raise overall prices through the food route.

Food prices and rains

On April 8, the Reserve Bank of India (RBI) said it expects CPI inflation to average 4.6% in 2026-27, more than double the price rise seen last year. Underpinning this forecast was the assumption of a normal monsoon in 2026-27 and 2027-28. Just a week later, this key assumption already requires a rethink.

To be sure, the relationship between rainfall and agricultural production – and therefore, food inflation – is mixed; there have been instances of years with good rainfall witnessing high inflation and vice versa.

“Also, the buffer situation of the foodgrains looks sufficient to thwart any untoward disruption on Kharif production front, if it be so. As a solace, food production too has apparently little co-relation with rainfall pattern, even the years with lower than LPA rains witnessing good output,” Soumya Kanti Ghosh, State Bank of India’s Group Chief Economic Adviser, said in a note on Monday. What matters, Ghosh said, is how much it rains in the major crop-producing regions of the country – or, spatial distribution – and when it rains, or temporal distribution, in terms of the sowing period and when crops are growing. Forecasts for spatial and temporal distribution will be made by IMD in May.

However, poor rainfall can impact agricultural production through a different route. According to ratings agency ICRA, a below-normal monsoon forecast “does not augur well for replenishment of reservoir storage level”. Data from the Central Water Commission shows that as on April 9, the all-India reservoir storage stood at 44.7% of live capacity at full reservoir levels, 18% higher than a year ago and 27% more than normal storage levels.

“Reservoir levels typically exhibit a seasonal pre-monsoon (March-May) drawdown, followed by Southwest Monsoon-led replenishment during June-September. Consequently, a below-normal rainfall expectation for the year, is likely to limit the reservoir replenishment,” ICRA noted.

Of course, the IMD can get its forecast wrong. In April 2022, it had predicted the monsoon to be 99% of the LPA, only for actual rainfall to be 106%. Something similar happened in 2019 and 2020. At the same time, IMD’s forecast of 92% is the lowest in 25 years.

Farm output impact

Water stored in reservoirs around the country would prove to be particularly crucial for irrigation if the El Nino phenomenon hits rainfall. According to ICRA, on the eight occasions in the last 24 years that India has witnessed El Nino conditions, the monsoon has been 1-22% lower than the LPA. This led to a fall in the kharif output by as little as 1.6% in 2006 and as much as 23.3% in 2002. “Moreover, rabi output contracted in four of such eight years, including in 2002 (-13.7%), 2009 (-2.3%), 2014 (-9.7%) and 2018 (-0.3%),” ICRA said.

Should agricultural output be adversely affected due to sub-par rains, it would hit farm incomes. In conjunction with higher food inflation, this could pose a problem for the rural economy, which has done well over the last two years due to the good monsoon.

War and rain

What happens to inflation when war and weak rain strike together? As per HSBC economists, if the El Nino is moderate, CPI inflation may end up higher than the RBI’s 6% upper tolerance limit if Brent oil prices average $100 per barrel in 2026-27. In the case of an extreme El Nino, average inflation this year may exceed 6% at $90/bbl Brent prices.

“Brent averaged $100/bbl in March and suggests a crossroads. Whether the price dips below $100/bbl or remains well above over the next month could determine whether or not the repo rate is increased,” HSBC economists led by Pranjul Bhandari said in a note on April 2.