Direct impact of poor rains on inflation and growth is weakening. The indirect hit is harder to ignore.

During 1–23 June, cumulative rainfall was 42% below the long-period average, according to data from the India Meteorological Department. The spatial distribution is also worrying, with broad-based deficiency and central India the worst affected. Weak and uneven rainfall in key sowing states raises risks to kharif crop output, given that much of the sowing takes place in July.

A delayed and deficient monsoon can hit reservoir levels, food inflation, rural incomes and consumption. Given their weight in the retail inflation basket, elevated food and fuel prices tend to compound inflation pressures.

India has faced El Niño-led rainfall shortages in the past. “For two consecutive years in FY15 and FY16, India had a large monsoon deficit of 12% and 14%, respectively, pushing kharif crop output 2.3% lower in FY16,” said Gaura Sen Gupta, chief economist at IDFC First Bank.

However, consumer price index (CPI)-based food inflation eased to 4.9% in FY16 from 12.1% in FY14. Over time, the link between monsoon performance and food inflation has weakened, she said, aided by better government management of food supplies and minimum support price interventions.

Similarly, the direct relationship between rainfall variability and economic growth has also weakened. A gradual shift from an agrarian to a services-led economy, expansion of irrigated land, stronger food stock buffers and improved reservoir levels have all helped cushion the impact.

Rajani Sinha, chief economist at CareEdge Ratings, points out that 13 of the 23 years since 1951–52 in which agricultural gross value added (GVA) declined occurred during El Niño years. But 20-year rolling regressions show a declining sensitivity of both agricultural and overall GVA growth to rainfall deviations, she added. (Rolling regression is a time-series method used to assess how relationships between variables evolve over time.)

Still, there are indirect but sharper repercussions of poor rainfall that do not fully show up in headline inflation or GVA data. Higher food and fuel inflation can erode purchasing power and dampen consumption, particularly in rural areas. Tractors, entry-level passenger vehicles, motorcycles, fast-moving consumer goods (FMCG), including biscuits and hair oils, consumer durables and microfinance are among the most exposed.

“Historical evidence suggests that these categories typically experience demand slowdowns during periods of elevated food inflation and weak monsoon conditions,” said a Motilal Oswal Financial Services report.

The brokerage highlights that despite accounting for a smaller share of India’s GDP, rural consumption contributes disproportionately to volumes across product categories. In urban markets, discretionary spending for categories of paints, cement and quick service restaurants can be hit, weighing on earnings growth outlook.

Amid El Niño conditions, also associated with higher temperatures, upside risks to food inflation are emerging from fruits and vegetables, particularly tomatoes, potatoes, and onions. Prices of cereals, pulses, oilseeds and vegetables have already risen month-on-month in June.

Against this backdrop, Bloomberg consensus estimates for FY27 retail inflation have risen from 4% at the beginning of the year to 4.9%. The Reserve Bank of India, in its 22 June monthly bulletin, acknowledged risks to growth and inflation from the monsoon shortfall. At its 5 June policy meeting, the RBI cut its FY27 growth projection to 6.6% from 6.9% and raised its inflation forecast to 5.1% from 4.6%. A prolonged El Niño into the second half of the year could also weigh on the rabi sowing season.