Weak monsoon risk: Food inflation may test RBI in 2026

Why the monsoon is back in focus

A weak monsoon is emerging as India’s next inflation risk, with economists warning that a developing El Nino could curb rainfall and lift food prices. The concern comes at a time when easing oil prices are relieving broader price pressures, shifting attention to food and weather-linked items. The Reserve Bank of India (RBI) has kept its policy stance neutral, but the risk is that a weather shock could push inflation higher even if non-food components remain relatively stable. Several economists cited rainfall as a bigger near-term inflation swing factor than crude oil. Poor rains can quickly transmit into household budgets through staples, vegetables, and protein items. That matters for policy because food has a large weight in India’s consumer price index (CPI). It also matters for market expectations around when and how the RBI might adjust rates.

RBI policy setting and what could change

The RBI left its key rate unchanged at 5.25% this month and retained a neutral stance, with inflation described as comfortably within the 2-6% target range. But research referenced in the report suggests rainfall shocks can shift the inflation path quickly. QuantEco Research economist Yuvika Singhal estimated that a 10% rain deficit could add as much as one percentage point to headline consumer inflation, driven by food prices. Madan Sabnavis expects headline inflation to top 5.5% by October, near the upper end of the RBI’s tolerance band, on food-price pressure. If that plays out, it could force the RBI to hike rates, which would be the first increase since February 2023. The story frames this as a risk scenario rather than a base case, but it highlights how weather can constrain rate-cut hopes. It also shows why the RBI’s “neutral” stance remains sensitive to incoming food and monsoon data.

Economists: rainfall now a bigger risk than crude

Economists quoted said a weak monsoon has overtaken crude oil as India’s main inflation risk. Dr Manoranjan Sharma, Chief Economist at Infomerics Ratings, said the bigger inflation risk for India today is no longer crude oil but rainfall. He added that weak monsoons, especially under El Nino conditions, raise household expenses through higher food prices. He flagged vegetables, pulses, edible oils and milk as categories where inflation can move into double digits during poor rainfall periods. At the same time, the report notes this does not automatically imply a full-blown inflation crisis, suggesting buffers and policy responses can limit second-round effects. Another view in the report, from Vishrut Rana, points to a mix of pressures including increasing energy prices, inadequate monsoon rains, and a declining rupee. Rana nevertheless expects inflation to remain within the RBI’s 4% to 6% target range.

Near-term price signals from staples and vegetables

Retail and agribusiness executives cited in the report said prices of key staples have risen sharply over the past month on a sequential basis, pressuring kitchen budgets. Mustard and sunflower oil, rice, and tomatoes were reported to have jumped as much as 50% sequentially in the last two to four weeks. Wheat flour (atta), refined flour (maida), semolina (suji), and sugar were also reported to have risen up to 6% over the past month and are 8-12% higher year-on-year. Industry data cited added that atta, maida and suji are up 5-5.5% in the past month, while wheat is up 3%. Rice prices were reported to have surged 10-15% in the last two weeks after Bangladesh and Kenya announced plans to import rice. For the Swarna variety, prices were cited as rising from Rs 29/kg to Rs 32.50/kg.

Why food inflation can still look “contained” in the data

Despite the recent sequential spikes in some items, the report points out that overall food inflation remains contained at the aggregate level right now. It notes that food inflation peaked in 2022 and stayed high till 2024, but recent readings have eased. Government data cited showed food prices in a deflation zone in June at -1.06% year-on-year, attributed to lower prices across vegetables, pulses, meat and fish, cereals, sugar, confectionery, milk and dairy products, and spices. Some executives described the current spike in specific commodities as temporary, expecting easing in two to three months as new crops arrive. Crisil’s Guha said edible oil price increases should ease after the October-November harvest, with better yields anticipated for palm and sunflower.

2025 monsoon outlook and MSP: a different signal

Not all weather indicators in the report point to stress. The Indian Meteorological Department (IMD) raised its monsoon forecast for 2025 to 106% of the long-period average (LPA), up from 105% forecast in April. It also expects June rainfall to be above normal at 108% of the LPA. The government also announced an average 4.5% rise in minimum support prices (MSP), with rice receiving a 3% hike. NITI Aayog member Ramesh Chand said the early onset of monsoon is a net positive for crops and that a higher-than-average monsoon forecast can increase kharif output. He also said farm output growth of more than 4% is becoming the new normal, supporting longer-term low food inflation.

Output and inflation backdrop from NITI Aayog

Ramesh Chand said farm output is expected to have grown 4.6% in FY25, up from 2.7% in FY24. He said food inflation, which cooled to 3.75% in February from 5.95% in January, is likely to remain below 4%, providing relief if there is no unforeseen shock. He also noted food inflation had touched 10.87% last October but declined subsequently, calling February’s number the lowest since May 2023. The agriculture ministry is expecting a bumper wheat crop at 115.43 million tonnes in the 2024-25 rabi season, and Chand said weather conditions were very normal during harvesting. However, he flagged two areas of concern: vegetable oil prices rising internationally and in India, and higher prices of some fruits such as citrus. Separately, the report notes the government allowed 2.3 million tonnes of rice to be allocated for ethanol.

2026-27: El Nino and oil scenarios could tighten the band

The report links the monsoon risk to the RBI’s inflation outlook and global energy assumptions. On April 8, the RBI said it expects CPI inflation to average 4.6% in 2026-27, more than double the price rise seen last year, according to the report. HSBC economists cited warned that if El Nino is moderate, CPI inflation may end up above the RBI’s 6% upper tolerance limit if Brent averages $100 per barrel in 2026-27. In the case of an extreme El Nino, HSBC economists said average inflation may exceed 6% even if Brent averages $10 per barrel. These scenarios underline the joint role of weather and energy in shaping inflation outcomes. They also frame why markets may watch both monsoon updates and oil trajectories, not just core inflation.

Fertiliser supply risk alongside rainfall uncertainty

Beyond rainfall, the report flags a Gulf fertiliser crunch threatening kharif 2026 as another factor that could lift food commodity prices. It cites a “second risk” alongside the fertiliser crunch: a 60% likelihood of below-normal monsoon rainfall in 2026, as noted by Torero. Food commodity prices, he said, will rise in the second half of 2026 and into 2027, feeding into headline inflation and forcing central banks to raise interest rates. The report also says India’s food prices are currently contained, with government action, adequate stocks, and the “60-day clock” not yet expired. But it argues that structural conditions for sharper price rises in the second half of 2026 are in place, including fertiliser supply strain, a potentially weak monsoon, fiscal pressure on subsidies, and a global food system the FAO says cannot fully recover by 2030 if Gulf disruption persists.

Key numbers at a glance

What investors and households are watching next

For households, the immediate watchpoints are vegetables, edible oils, and cereal-linked staples where the report already notes sharp short-term price changes. For investors, the key issue is whether food inflation remains “contained” at the headline level or shifts rapidly due to rainfall shortfalls, especially if oil prices also rise. The RBI’s neutral stance provides flexibility, but the report makes clear that a food-led inflation spike could change the rate narrative quickly. The monsoon outlook for 2025 is currently supportive, but 2026 carries a stated risk of below-normal rainfall and fertiliser constraints. The next leg of the story will depend on how rainfall, sowing, and supply conditions evolve, and whether sequential retail price spikes translate into sustained CPI pressure.

Conclusion

Economists in the report see monsoon weakness and El Nino risk as a bigger inflation threat than crude oil, with potential to lift food prices and complicate RBI decisions. With the policy rate at 5.25% and inflation within the target band for now, the path hinges on weather, supply conditions, and energy prices in 2026-27. Updates on monsoon performance, crop arrivals, and fertiliser availability will be the key confirmed milestones shaping the inflation narrative into late 2026.