DBS Group Research economist Radhika Rao has analyzed the potential impact of a projected below-normal monsoon in India for 2026, which is linked to expectations of a strong El Niño event [1]. According to the Indian Meteorological Department (IMD), seasonal rainfall across the country is forecasted to be 8% below the Long Period Average (LPA), with a 66% probability that the monsoon will be below normal or deficient [1]. The risk of heatwaves during the April to June quarter has also been highlighted as a concern [1].
Agriculture's share in India's GDP is modest at 16-17%, but the sector still accounts for just under half of overall employment in recent years [1]. The crops sub-component under gross value added (GVA), which constitutes half of the agriculture, forestry, and fishing (AFF) sector, is highly correlated with foodgrain output [1]. The economic impact of the monsoon shortfall will depend on the severity, intensity, and duration of the El Niño, as well as the distribution of rainfall, not just its aggregate strength [1].
Despite these risks, Rao notes that price pressures could be partially mitigated by India's ample official foodgrain stocks and potential supply-side countermeasures [1]. The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) is not expected to react with urgency by tightening policy in response to supply-side pressures from energy and food [1]. The risk of further rate hikes would only increase if there are clear signs of a sharp rise in inflation expectations and a sustained spillover of elevated headline inflation into core inflation readings [1].
DBS's baseline view is that the RBI will keep the benchmark rate unchanged during 2026, despite the potential supply-side pressures stemming from the monsoon outlook and El Niño risks [1].
CONCLUSION
DBS projects that while a below-normal monsoon in India could pose inflation risks, the RBI is expected to maintain its current policy stance in 2026 due to mitigating factors like ample foodgrain stocks. The overall market impact is assessed as medium, with the central bank likely to act only if inflation expectations rise sharply.