Tantrum of a problem child might cool India's economic engine

The India Meteorological Department (IMD) delivered a sobering update on Friday by maintaining its forecast for a below-average monsoon in 2026. The weather watchdog warned that the weather pattern called El Nino (which literally means 'the child') is rapidly locking into place across the equatorial Pacific Ocean with a staggering 92% probability of dominating the crucial June to September season. With cumulative rainfall projected at just 90% of the long term average, the nation is staring at its weakest monsoon in over a decade.

A research report from HDFC takes a deep dive to map out the impact of below-normal rainfall on crops and inflation. The report breaks down how the developing dry spell might squeeze agricultural output and spike inflation.

ALSO READ | IMD retains below-normal monsoon forecast; Raises worries for farms and food bills

This can also lead to disruption of rural consumption. "Based on past trends, we find that El Nino years are usually associated with a moderation in rural wages, increase in worker demand for MNREGA (that acts as a social safety net) and a fall in big ticket purchases like Tractors. For items such as two-wheeler sales, the impact during El Nino years is not immediate and usually comes with a lag and depends on the intensity of El Nino and impact on rural incomes," says the report.

Impact on crops

"India has witnessed seven El Niño episodes over the past 25 years, with six of them associated with below-normal monsoon rainfall usually with a deficiency of 8-10% of LPA (Long period average). Based on historical analysis, we find that each percentage point of monsoon shortfall below the LPA is associated with approximately 0.4 percentage points of lower crop GVA growth," says the report.

But, the report says, the impact of a below-normal monsoon can vary across crops. "For one, Bajra, Maize, and oilseeds (specifically groundnut) – all primarily rain-fed, sit at the vulnerable end of the spectrum. We find the impact of 1 ppt deviation in rainfall below normal LPA to impact production in these crops by -0.9 to -1.6 ppt. Second, kharif pulses like Tur which has production concentrated in areas with sparse irrigation also remain vulnerable. For instance, Maharashtra that accounts for close to 40% of all India tur production only has 14% area under irrigation for the crop. On the positive side, rice is found to be less vulnerable to monsoon rainfall with high irrigation coverage area of close to 70%."

Can El Nino impact the winter crop as well? The report says this will be determined by the impact of El Nino on reservoir storage. "In years where El Nino impact is concentrated in the earlier part of the kharif season and rains catch up in the latter part of the season – the impact on reservoir levels and rabi sowing may be minimised. Therefore, historically, we do not necessarily see all El Nino years showing a drop in rabi production. Moreover, this year, as of April 2026, reservoir storage stands at 41% of live capacity, the highest reading for this point in the year since 2022, and well above the 30-36% range seen in 2024 and 2025. Most importantly, it is higher than where the 2023 El Niño year began. This could provide some cushion for the Winter crop in the upcoming season."

The report says the distribution of rainfall also matters. "Kharif crops are sown between June and August and harvested in Oct-Nov. The impact on agricultural production or yields is therefore influenced by when El Niño conditions impact rainfall during the season. If rainfall is weak during the beginning of the season it has an impact on sown area. However, if the impact of El Nino falls during the latter half of the season, the impact could be felt less on sowing and more on yields (and therefore production growth)," it says.

Inflation

The report says that besides rainfall, food prices are also influenced by heatwaves and temperature, international commodity prices, and supply conditions. "During El Nino years (except for FY19) over the last decade, food inflation was close to 170bps higher when compared to normal monsoon years. However, the magnitude of impact on food inflation components during these episodes show large variations," the report says.

Temperature matters for vegetables as well as milk. "We observe that higher the deviation of average temperature from the LPA, higher the quantum of impact on food inflation especially for milk and vegetable prices. Between FY20 and FY25, when deviation of average temperature from LPA has been high (>= 0.5 °C), food inflation has averaged at ~7.2%, irrespective of whether rainfall was normal or not. Milk prices tend to be higher during El Nino years and during severe heat wave years. This could be explained by low dairy yield due to severe heat stress. El Nino or heat wave years also can see a shortage of fodder, putting pressure on input costs. For vegetables, onion and tomato prices remain vulnerable to heat waves. A strong rabi harvest this year could limit any immediate pressure on onion and potato prices. However, kharif onion is important to bridge the supply during the lean period during Aug-Oct. A below normal rainfall and heatwaves remains a risk for kharif sowing of onion that could build pressure on onion prices during the second half of the year. The immediate risk is for tomato prices on account of the heat wave situation in various parts of the country. Tomato crop is sown during three season including Jun -Jul, Sep-Oct and Dec-Jan. In May-till date, tomato price is already up by 34% m-o-m," says the report.

The report says global trends will also influence cereal prices. "We find a strong correlation between global and domestic cereals inflation. This year, El Nino development could also negatively impact other major rice producing Southeast economies including Indonesia, Thailand, Vietnam and Philippines, resulting in lower global production and an increase in global prices. As per USDA forecasts, global production for both wheat and rice is expected to be lower in 2026-27," the report says.

Pulses can be influenced by past production patterns, apart from vulnerability to rainfall. The report says higher prices in one season encourage an increase in production in the next, resulting in an oversupply and a decline in prices in the subsequent year, and so on. "In FY26, pulses inflation declined by ~ 10% y-o-y and this could moderate the area under sowing in the current kharif season following the cobweb phenomena," says the report.

The report says overall fertilizer stock position remains comfortable (as per the latest available data), but urea and MOP remains lower than same period last year. Price increases of fertilizers can encourage farmers to move away from crops that are highly dependent on fertilizers (like cotton) and also raise farm input costs and in turn food inflation.