India’s Monsoon Risk is Really an Inflation and Rural Demand Test

India enters the 2026 southwest monsoon season with a less comfortable weather backdrop than policymakers, farmers, and markets would have preferred. The India Meteorological Department’s long-range forecast projects rainfall at 90% of the long-period average, with a 4% error margin, placing the season in the below-normal category. At the same time, the monsoon model suggests the development of El Niño conditions during June–September, while Indian Ocean Dipole conditions are neutral and are expected to remain so.

A positive Indian Ocean Dipole can sometimes soften El Niño’s adverse impact on India’s monsoon, but this year, there is no such offset visible yet. Heatwaves are also continuing across parts of northwest and central India, with above-normal maximum temperatures expected over most parts of the country in June.

The immediate implication is not merely meteorological, as a weak monsoon, if it materialises, could test crop production, food inflation and rural demand over the coming months. The risk is not uniform, and that is where the policy and market discussion needs to be more granular.

Crop Sensitivity
India has seen seven El Niño episodes over the past 25 years and six of them were associated with below-normal monsoon rainfall, usually with a deficiency of 8–10% of the long-period average. Historical analysis suggests that each percentage point of monsoon shortfall below the long-period average is associated with about 0.4 percentage points of lower crop gross value-added growth.

That aggregate relationship, however, hides large differences across crops. Bajra, maize and oilseeds, especially groundnut, are at the vulnerable end of the spectrum because they are primarily rain-fed. A one percentage point deviation in rainfall below the normal long-period average can affect production in these crops by 0.9–1.6 percentage points.

Kharif pulses, such as tur, also remain exposed. Tur production is concentrated in regions with sparse irrigation. Maharashtra, for instance, accounts for close to 40% of India’s tur production, but only about 14% of its tur area is irrigated. That makes the crop more sensitive to rainfall disruption.

The timing of rainfall will be as important as the aggregate number, as Kharif crops are sown between June and August and harvested in October–November. If rainfall is weak at the beginning of the season, the impact is more likely to show up in the sown area. If El Niño affects rainfall later in the season, the impact may be felt more through yields and production.

The 2023 episode is useful in this context, when the sowing area remained largely intact because rainfall deficits were concentrated after sowing was mostly complete. In contrast, earlier El Niño episodes such as 2002, 2004, 2009 and 2015, where the impact came during sowing months or lasted through the season, saw declines in both sowing area and yields.

Although monsoons usually have a larger bearing on the summer crop, the winter crop is indirectly affected through the impact of low rainfall on reservoir levels. This year, the winter crop may be somewhat cushioned, at least for now. Reservoir storage stood at 41% of live capacity as of April 2026, the highest reading for this point in the year since 2022 and above the 30–36% range seen in 2024 and 2025. It is also higher than where the 2023 El Niño year began. If rains catch up later in the season, the impact on reservoir levels and rabi sowing could be contained.

Food Prices
The inflation risk from this monsoon season will not come from rainfall alone. Food prices are influenced by rainfall, heatwaves, temperature deviations, global commodity prices and domestic supply conditions. During El Niño years over the past decade, excluding 2018-19, food inflation was about 170 basis points higher than in normal monsoon years.

Temperature is a key part of the story, and in recent years, when the deviation of average temperature from the long-period average was 0.5 degrees Celsius or higher, food inflation averaged about 7.2%, irrespective of whether rainfall was normal. This suggests that heat stress can be as important as rainfall deficiency in shaping food inflation outcomes.

Milk and vegetables are particularly exposed to heat, and milk prices tend to rise during El Niño years and severe heatwave years because dairy yields can fall under heat stress, and fodder shortages can raise input costs. This year, higher packaging costs linked to petrochemical prices could add another layer of pressure.

Vegetables carry the more immediate risk, although a strong rabi harvest could limit near-term pressure on onion and potato prices. Yet kharif onion is important for bridging supply during the August–October lean period. Below-normal rainfall and heatwaves could affect kharif onion sowing and create price pressure later in the year.

Finally, cereal inflation will depend not only on domestic production but also on global prices.

Domestic cereal prices have a close correlation with global prices. El Niño development could affect major rice-producing Southeast Asian economies such as Indonesia, Thailand, Vietnam and the Philippines. USDA forecasts point to lower global production of both wheat and rice in 2026-27. Comfortable domestic cereal stocks and potential supply-side measures could limit the pass-through, but global prices remain a risk to monitor.

Rural, Inc.

Farm input costs also deserve attention. While fertiliser stock positions are comfortable overall, urea and muriate of potash stocks are lower than a year earlier. Any sharp increase in price pressure during sowing could encourage farmers to shift away from fertiliser-intensive crops such as cotton. Fertiliser prices could raise farm input costs and indirectly feed into food prices.

The rural demand implications may take longer to show up. Past El Niño years have usually been associated with softer rural wages, higher demand for MGNREGS work and weaker big-ticket purchases such as tractors. MGNREGS demand is therefore a useful real-time monitor of within-season stress, because it captures the income-substitution channel when farm incomes come under pressure.

The policy message is therefore not that a below-normal monsoon automatically produces a broad inflation shock. The more important point is that the 2026 season has opened with several overlapping risks including rainfall deficiency, possible El Niño, heatwaves, global cereal price sensitivity, higher fertiliser and energy costs. The outcome will depend on the timing and distribution of rainfall, the evolution of temperatures, reservoir replenishment and supply-side responses.

For inflation, the watch list is clear: vegetables, milk, pulses, cereals and farm inputs. For rural demand, MGNREGS demand and tractor sales will offer the early signals. The monsoon number will matter, but the distribution of the stress will matter more.

(The article is based on research findings by HDFC Bank in its report :Whether the weather be hot:Impact on crops, inflation and consumption” written by Sakshi Gupta, Deepthi Mathew and Divya Srinivasan.)