Monsoon Deficiency Raises Concerns Over India's FY27 Inflation Projections

India's Monsoon Forecast: A 10 Percent Deficient Rainfall Predicted, Economists Warn of Headline Inflation Rise

The India Meteorological Department (IMD) has predicted a 10 percent deficient rainfall, along with the persistence of heatwave conditions, which could dampen food production across India, particularly in the northwest, central, and southern regions. Economists warn that this could result in a headline retail inflation rate of over 5 percent.

A strong monsoon is intrinsically linked to the health of the Indian economy. A strong monsoon boosts rural income and eases inflation, while deficient rainfall can pull down farm output and hurt spending power, particularly in rural areas. However, an official from IMD says that crop failure due to deficient rains may not be much, as farmers will plan their sowing better and may shift to alternate crops, due to early forecasts.

Experts reckon millets, maize, pulses, and oil-seeds as the alternate crops, as they are not as water-intensive as paddy. This factor alone may not move the needle on food inflation by more than 25 basis points, said Debopam Chaudhuri, Chief Economist, Piramal Group.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

However, if the monsoon shortfall is accompanied by drought conditions across major kharif-growing regions—as can occur during a severe El Niño event—headline food inflation could rise by as much as 50 basis points, while rural consumers may face significantly higher price pressures than their urban counterparts.

Economists at ICICI Bank also expect headline inflation to be over 5 percent driven by higher food and energy prices. Food inflation is seen rising in both retail and wholesale indices, with a number of segments such as meat, fish and other seafoods, fruits, edible oils, and ready-made products witnessing an uptick. The perishables such as veggies and fruits could see a near-term pick-up due to summer uptick and extreme heat conditions across the North and Central parts of the country.

The India Meteorological Department's (IMD) latest forecast, released on May 29, predicts rainfall to be 10 percent below normal (90% of long-period-average) during the Jun-Sep 2026. These estimates are lower than the earlier estimates of rainfall being 8% below normal. As per the latest estimates, there is an 84% probability for monsoon to record below normal to deficient rains now, compared with a 66% probability assigned in the first long-range estimates.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

IMD has also hinted toward a persistence of the extreme heat conditions to prevail in coming months. This, along with delayed and dryer monsoon expectations, poses a risk for early sowing activities in affected areas, which could be amplified with the disruptive El Niño phase, economists say.

With rainfall seen below normal across the major crop-producing regions in Northwest, Central, and Southern regions, there is a significant risk to food production outlook this year. About 40% of total crop production in the country is concentrated in the Monsoon Core Zone, which is likely to see lower rainfall coverage this year.

Additionally, paddy production is mainly concentrated in Northwest region (27% of total) and East and Northeast region (23%), followed by an equal distribution in Central and Southern India (15% of total each). "With the higher irrigation coverage for paddy, the delayed or below normal rains should ideally have lesser impact on the crop sowing. Same is the case with wheat, which is produced in Northwest India (68% of total) and Central India (25%), with both of these regions likely to get below normal rains," noted the report by ICICI Bank.

If soil moisture is lower (deficient rainfall) and reservoir levels are not sufficient at that time, there could be some impact on the production of paddy and wheat. Reservoir levels as of May 29 stood at 31 percent of total capacity, which is higher than the long-period average of 26 percent of total.

The country holds 513 LMT of wheat stocks as against the buffer norms of 275 LMT (as on July 1), C Shikha, joint secretary, department of food and public distribution, said. Rice stocks also remain sufficient at 397 LMT against buffer norms of 135 LMT.

"We are comparing the situation with 2015 because that year was also deficient, with rainfall at around 88 percent. But despite that, there was not much crop failure as early forecasts helped planning and farmers shifted to alternate crops. Production was slightly below normal, but losses were not very high," said D S Pai, head of the Regional Meteorological Centre (under IMD), Chennai.

"This year, the situation is better than 2015 in one key aspect. The last two years have seen good monsoons, so reservoir levels are much better than they were in 2014-15, except in some southern parts," he added.

Pai explains that the deficiency is particularly expected in central India, where a large part of agriculture is rain-fed. There will definitely be an impact on food production, especially paddy and other crops unless irrigation facilities are available, he said.

"If positive factors such as the Indian Ocean Dipole or other intra-seasonal variations support the monsoon, rainfall could improve to around 94 percent. But if conditions worsen, it could go down to around 86 percent. That is why we keep a plus or minus 4 percent uncertainty," Pai noted.

Former Agriculture Secretary Siraj Hussain told Moneycontrol: "Agriculture production will depend a lot on distribution of monsoon. If we get 10% lower rainfall than LPA, but we get rains every week, then the impact on production will not be very high. So at this stage, it is very difficult to say what will be the loss. In 2014-15 and 2015-16, we faced two consecutive droughts, but the loss of production was just about 5%."