Weak monsoon could push India's inflation to 5%: S&P
What's the story
A weak monsoon in India could push up inflation, weaken rural demand, and strain fiscal balances. This is according to a report by S&P Global Ratings. The agency has predicted that the 2026 southwest monsoon will be much weaker than usual with rainfall expected at about 90% of the long-period average.
Climate concerns
El Nino effects and inflation risks
The report also highlights the emergence of El Nino conditions, which are expected to intensify during the monsoon season. This further increases the risk of weaker rainfall and greater intra-seasonal volatility. S&P Global Ratings warned that "weaker monsoons are associated with sharp increases in inflation," as disruptions in agricultural production quickly feed into food prices.
Economic impact
Projected inflation increase and RBI's policy stance
The agency expects the agricultural shock, along with higher food and energy prices, to push inflation up to 5.1% in FY27. This is a significant jump from the current inflation rate of 3.9% year-on-year in May. S&P Global Ratings also predicts that the Reserve Bank of India will maintain a moderately tight policy stance, which could further weigh on economic activity.
Fiscal challenges
Need for fiscal support measures
A prolonged dry spell could necessitate larger fiscal support measures, including higher fertilizer and food subsidies. It could also require an expansion of rural employment schemes such as MGNREGA, potentially derailing fiscal consolidation plans. However, S&P Global Ratings noted that public food grain stocks, distribution system and rural employment schemes would cushion the blow from these changes.
Sectoral vulnerability
Most vulnerable sectors to a weak monsoon
S&P Global Ratings has identified agrochemicals, tractors, and two-wheelers as the most vulnerable sectors to a weak monsoon. It said tractors and agrochemicals have "very high" sensitivity to weak monsoons with indicative volume declines of around 10% during previous years of poor rainfall. Two-wheelers could see a 5-10% hit while FMCG volumes may be impacted by 2-5%.