Monsoon Season at Risk from El Niño, Fertiliser Shortage Worsens Amid Escalating US-Iran Tensions: Investors on High Alert for Potential Market Volatility

India's Rural Economy Faces Twin Risks of Monsoon Deficiency and Rising Input Costs

A forecast of a below-normal monsoon in 2026 has heightened concerns among investors, as the US-Iran war has driven up crude oil and fertiliser prices, increasing input costs for companies. According to Skymet, India may experience one of its driest monsoons in years, with rainfall predicted at 94% of the long-period average, below the normal 96-104% range. The India Meteorological Department (IMD) has also pegged the rainfall at 92% of the 50-year average due to the El Niño effect.

A deficient monsoon and rising fertiliser costs can derail the rural growth momentum and fuel food inflation, damaging the favourable growth-inflation outlook of India. Systematix Shares and Stocks has noted that India's rural economy faces a twin risk of monsoon deficiency and sharply rising input costs in 2026, threatening agricultural output, farmer incomes, rural demand, and food inflation.

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The South-West monsoon is critical for India's economic growth, as the country's agri sector heavily depends on these seasonal rains. A healthy kharif harvest boosts rural incomes, resulting in higher demand for FMCGs, tractors, automobiles, two-wheelers, and consumer durables. On the other hand, a deficient or erratic monsoon can lead to reduced kharif sowing, lower reservoir levels, weaker rabi prospects, and elevated food inflation.

Systematix underscored that the combination of a likely below-normal 2026 monsoon and elevated input costs for the agri sector due to the US-Iran conflict creates a challenging outlook for agricultural production, rural consumption, and inflation management. The Union cabinet on 8 April approved nutrient-based subsidy (NBS) rates worth about ₹41,533.81 crore for phosphatic and potassic (P&K) fertilisers for the upcoming kharif season.

Experts believe that the risks are real and raise near-term uncertainty, but they are more likely to cause growth moderation and market dispersion in 2026 than a sustained downturn. According to Namrata Mittal, CFA, Chief Economist at SBI Funds Management, India remains exposed to higher crude prices given its import dependence, and a prolonged oil shock does worsen the growth-inflation trade-off. However, the growth impact is typically modest unless crude remains elevated well above $100 per barrel for an extended period.

Mittal believes elevated crude oil prices, fertiliser shortage, and El Niño risk raise the probability of slower growth and more muted headline returns in 2026, but they do not point to a sustained economic or market downturn. Policy response, the duration of the shocks, and corporate adaptability will ultimately determine outcomes. Caution is warranted—but pessimism is not.

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