The Indian economy has till now emerged from the US-Iran conflict relatively unscathed. If the peace talks hold and the Strait of Hormuz opens, economists expect the impact of the war to be transient. However, a bigger worry for the economy appears to be loading – and one that may impact the domestic demand adversely – El Nino’s effect on monsoon.A normal monsoon is important for several reasons – most of all for the way it feeds into the economy’s growth and inflationary routes. A below average monsoon impacts crop sowing and harvest, which in turn leads to prices of vegetables and staple food rising.Since food forms an important part of inflation calculation, the price rise directly raises consumer price index (CPI) numbers. Another route that the economy gets impacted is through lower rural incomes due to crops being impacted. This means that a big demand driver takes a hit. If inflation goes much above RBI’s target of 4%, it may trigger a rate hike.Progress of monsoonThe progress of the southwest monsoon in June 2026 has been a cause for significant concern. Up to June 21, 2026, cumulative rainfall across the country was running 42% below the long-period average, a shortfall substantially larger than the India Meteorological Department‘s forecast of an 8% deficit for the month. However, with 10 days still remaining in June, the final outcome for the month is yet to be determined.The monsoon reached Kerala on June 4, 2026, three days later than its normal onset date of June 1 and more than a week after the IMD’s projected arrival date of May 26, 2026. As a result, the season got off to a weak start amid concerns linked to El Nino conditions.So far, rainfall performance during June 2026 ranks among the weakest seen in recent years. The last two years offer notable comparisons.2019: As of June 21, 2019, cumulative rainfall was 43% below normal, a deficit very similar to the one seen this year. Despite the poor start, rainfall activity strengthened during August and September, allowing the season to finish with a surplus of 10%. Although 2019 was influenced by a weak El Nino, the phenomenon had faded by the time the monsoon season reached its peak.2023: Another weak beginning was recorded in June 2023, when rainfall up to June 17 stood 42% below normal. That year also coincided with El Nino conditions, which intensified later in the monsoon season. Nevertheless, stronger rainfall during the final two weeks of June helped reduce the monthly shortfall to 10%, while the overall monsoon season ended with a rainfall deficiency of 6%.“The contrasting experiences of 2019 and 2023 underscore the fact that early rainfall deficits in the season may not necessarily be reliable predictors of seasonal outcomes. The eventual performance of the monsoon depends less on its initial onset and more on the evolution of rainfall through the core monsoon months, which in turn is influenced by the timing and intensity of prevailing climatic drivers, and El Nino,” says QuantEco Research in its latest report.“Over the Southwest monsoon season, India will most likely witness a moderate to strong El Nino. IMD’s 10% rainfall deficiency appears fairly reasonable by historical standards, with risks tilted to the downside in our view,” the report adds.Reservoir levels continue to fallThe sluggish progress of the monsoon has also been reflected in reservoir storage levels, which have declined noticeably in recent weeks. As of June 18, 2026, water storage stood at 27.7% of total reservoir capacity, down from 34.3% at the end of May 2026 and below the 31.8% recorded during the corresponding period last year.
Sharpest deterioration in reservoir levels, since 2020
A comparison with the last six years shows that 2026 has witnessed the steepest reduction in reservoir levels between the end of May and the third week of June. Regionally, Southern India has recorded the sharpest decline relative to year-ago levels.Among major agricultural states, reservoir storage is lower than last year in Andhra Pradesh, Jharkhand, Karnataka, Maharashtra, Rajasthan, Tamil Nadu, Telangana and West Bengal.Kharif sowing begins on a weak noteAs expected, Kharif crop sowing has also started slowly this year. Across all crops, the total area sown by June 12, 2026, was 3.9% lower than the corresponding period a year earlier.However, the current pace is not the weakest start in recent years. In both 2022 and 2024, Kharif sowing was even slower at the beginning of the season before gaining momentum later.“Typically, in years of monsoon uncertainty, farmers hold-off pre-monsoon sowing – a guideline that has been reinforced by the agriculture officials this year,” says QuantEco Research.The expansion of irrigated farmland in India is often viewed as a key factor that could help reduce the adverse effects of El Nino and the rainfall deficiencies that typically accompany it. By FY24, irrigation coverage for foodgrain cultivation had reached 62.6%, a significant improvement from roughly 35% in 1990.However, this broad national picture masks considerable differences across crops and regions. While the aggregate numbers appear encouraging, the underlying distribution of irrigation coverage is far from uniform.Sugarcane, owing to its high water requirements, has almost complete irrigation coverage at close to 100%. Irrigation penetration is also relatively high for rice and wheat, at around 70% and 95.5%, respectively.Beyond these crops, the picture becomes considerably weaker.For several major crops, irrigation coverage remains limited. Among key coarse cereals that are less water-intensive, only about 24% of the area under jowar is irrigated, while the corresponding figures for bajra and maize stand at 19% and 42%, respectively.The situation is similar for pulses, where irrigation covers roughly 35% of the cultivated area. For tur, the proportion is even lower at around 14%.Oilseeds and cotton also have relatively modest irrigation support, with coverage levels of 44% and 51%, respectively. Considerable variation exists even within the oilseed category. For example, only about 10% of the area under soybean cultivation is irrigated.As a result, pulses, coarse cereals, oilseeds and cotton remain the crop categories most exposed to the effects of deficient monsoon rainfall.Regional disparities are equally pronounced, the report says. Based on 2023-24 data, states with comparatively low irrigation coverage include Maharashtra (43.3%), Rajasthan (46.8%), Karnataka (43.3%), Jharkhand (17.2%) and Chhattisgarh (34.3%). These states are therefore likely to be among the most vulnerable if monsoon rainfall falls short of normal levels.Impact on agricultural GVAAccording to QuantEco’s preliminary estimates, there is a meaningful risk that crop GVA could contract by around 1% in FY27 if the expected 10% rainfall deficit materialises.“Historically, agri GVA and monsoon deviation show a strong correlation of nearly 60%. As such, for every 1% shortfall in monsoon, ~40 bps of agri GVA growth is sacrificed. Having said that, growth in agri allied sectors, share of which has steadily risen from ~30% in 1990 to 40% in FY25, could possibly cushion the downside,” the report says.
How deficient monsoon impacts agriculture GVA
As a result, while crop GVA could slip into negative territory, overall agricultural GVA growth in FY27 may still remain marginally positive, potentially in the range of 0-1%, the report predicts.Impact on CPI inflationHistorical evidence suggests that the direct relationship between monsoon outcomes and CPI food inflation is relatively weak, with the two variables displaying only a modest negative correlation that is close to negligible.QuantEco analysis shows that:• During years of below-normal monsoon rainfall, each additional 1% shortfall in precipitation is associated with an increase of about 25 basis points in food inflation.• In contrast, during years when rainfall exceeds normal levels, every 1% improvement in rainfall lowers food inflation by only around 15 basis points.When deficient rainfall reduces agricultural production, the resulting supply gap is reflected largely through higher prices rather than a meaningful decline in consumption. Consequently, even relatively small reductions in output can trigger disproportionately large increases in food inflation, the report says.For 2026, a rainfall deficit of 10% could, all else remaining unchanged, add approximately 250-300 basis points to food inflation. This, in turn, could contribute around 100 basis points to headline CPI inflation in FY27, QuantEco predicts.“Taking on board this food-led upside and persistence typically seen in food prices, the already effected fuel price hikes and their second-order impact, lagged transmission from commodity prices amplified by Rupee depreciation, we forecast FY26 CPI inflation now at 5.1%. This assumes global crude price averaging in the range of $80-85 pb post the US-Iran deal and impending opening of the Strait of Hormuz,” the report says.
