India: Monsoon risks and RBI stance – DBS

DBS Group Research economist Radhika Rao assesses how a projected below normal monsoon in India, linked to a strong El Niño, could affect growth and inflation. She notes that only a significant rainfall shortfall tends to materially hit output, while higher irrigated area and ample foodgrain stocks offer mitigation. Rao expects the RBI to keep rates unchanged in 2026 despite supply-side pressures.

El Niño, inflation and RBI policy

"The Indian Meteorological agency IMD has projected a below normal monsoon for 2026, in midst of expectations of a strong El Niño occurrence. Seasonal rainfall over the country is seen at 8% below the Long Period Average (LPA), with a 66% probability of monsoon being below normal or deficient. Risk of heatwaves was also highlighted as a risk for the Apr-Jun quarter."

"The share of agriculture in India’s growth mix is modest at 16-17% of GDP but has accounted for a little less than half of overall employment in recent years. The correlation of the crops sub-component under GVA (gross value added), which makes up half of overall agriculture forestry and fishing (AFF), and foodgrain output is high."

"The extent of the economic impact will depend on the severity, intensity, and length of the El Niño occurrence. At the same time, not only the strength of aggregate rainfall, but also its distribution can impact output."

"Encouragingly, price pressures can be partly mitigated by current foodgrain inventories and potential supply countermeasures. The country has ample official foodgrain stocks."

"The RBI monetary policy committee (MPC) is unlikely to exhibit urgency in tightening policy in response to supply-side - energy and food - pressures. The risk of further rate hikes will increase if there are signs of a sharp rise in inflation expectations and a sustained spillover of elevated headline inflation into core inflation readings. Our baseline view is for the MPC to keep the benchmark rate to keep rates unchanged during 2026."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)