The probability of El Nino forming between August 2026 is more than 80 percent.
Even though the crude oil crisis has subsided a bit and inflation pressure has reduced due to fall in prices, a new headache has arisen for the Indian economy. In fact, a weak monsoon is emerging as the next inflation threat for India. Due to El Nino, there is a fear of less rainfall and increase in prices of food items, while inflationary pressure has reduced due to softening of oil prices. The south-west monsoon, which provides about 70 per cent of India’s annual rainfall, is vital to the $300 billion agriculture economy. It has a huge impact on food prices, rural demand and overall economic output. Let us discuss about it in detail…
El Nino especially affects the monsoon in India.
keep a close eye on the weather
Rajni Thakur, economist at L&T Finance Limited, said in a Bloomberg report that poor rains have a negative impact on both the equity market and rural spending. L&T Finance does rural loan business of more than Rs 450 billion ($4.8 billion). He said that first inflation increases, then people’s mood deteriorates, due to which expenditure reduces during the festival season. Reserve Bank of India (RBI) officials have said that they are closely monitoring the weather to gauge the inflation situation and are prepared to take action if price pressures increase. RBI maintained its key interest rate at 5.25 per cent this month and adopted a neutral stance as inflation remained within its target range of 2-6 per cent.
This is how the effect looks
According to the research of economist Yuvika Singhal, economist of QuantEco Research, a 10 percent reduction in rainfall can increase the headline consumer inflation due to food prices by up to one percentage point. Till June 22, total rainfall in India was 43 percent less than normal. In rural India, the impact of the delay in the monsoon — which typically runs from June 1 to September 30 — is not first visible in government data. Instead, its impact is visible in the form of lower purchases of fertiliser, deferment of tractor bookings, fewer inquiries about motorcycles and low stock keeping by shopkeepers ahead of the festive season starting in September.
abundant grain stock
This weakness then spreads beyond the villages and impacts total consumption and growth. One relief thing is that India has abundant stock of grains. In an interview this week, Nagesh Kumar, an external member of the RBI’s monetary policy committee, tried to play down concerns over low rainfall this year. He said that with time farming has become less dependent on weather and abundant stock of grains provides security in times of shortage. On Wednesday, RBI Governor Sanjay Malhotra also pointed to India’s stocks as a potential safety net. However, economists warn that stocks can only partially compensate for the long-term impact of weather on production.
Inflation may increase in October
Bank of Baroda Chief Economist Madan Sabnavis said that the buffer stock is for rice and wheat, and not for pulses, oilseeds and coarse grains. He said that El Nino is a matter of great concern not only for India but for the entire world. We should not turn away from the truth. We import edible oil from South-East Asia. Lack of rain will affect them too. There is also a danger of delay in monsoon extending till late September and October, which may hamper harvesting and cause damage to crops. Sabnavis expects headline inflation to reach 5.5 percent by October due to rising food prices, which is close to the upper limit of the Central Bank’s target band. In such a situation, RBI can increase interest rates, which will be the first increase after February 2023.
Identification of drought districts
The government is trying to mitigate this impact by identifying 315 districts with low rainfall, including 111 high-priority areas with limited irrigation facilities. The emergency plan will provide guidance on crop selection, water use and emergency measures in major agricultural states. If the drought continues, the government is also increasing coordination with states to protect crop production and rural incomes. In 2023, due to delayed monsoon and low rainfall, New Delhi banned rice exports to control domestic prices, impacting a market that depends on India for about 40 percent of global rice shipments. There has been no indication of any such restrictions so far this year.
