The Finance Ministry's Monthly Economic Review (MER) has flagged intensifying El Niño conditions as a key risk to domestic food inflation and upcoming Rabi crops. According to the latest report, El Niño conditions are expected to persist through March 2027, requiring close monitoring due to implications for rainfall, crop outcomes, and food prices. The outlook for domestic food inflation and agricultural output remains cautious, with an intensifying El Niño expected to peak in late 2026. This could pose downside risks to crop yields during the late-August flowering and grain-formation stages, while also affecting soil moisture and the winter temperatures required for the upcoming Rabi crops, particularly wheat and mustard. The India Meteorological Department expects September rainfall to also be below normal at less than 91% of the long-period average, with continued dryness in September potentially hurting yields and tightening supplies of key food commodities.
Despite global uncertainties, India's economy showed vigor with 7.8% growth in Q1, higher than the RBI's 7% projection. As per the Finance Ministry's MER, the domestic economy retained its vigour during the month with domestic demand remaining strong, while the external sector remained stable. The report highlights that despite these external risks, India's economic activity, inflation and external position have remained relatively stable. However, the global economy remains uncertain because of growth, oil prices and different interest-rate policies. The external sector remains well-positioned to absorb the pressures arising from the changing global trade dynamics and volatile global financial conditions. While the current account deficit widened marginally in Q1 FY27, the subsequent recovery in capital flows, a resilient services surplus and comfortable foreign exchange reserves provide important buffers against external developments.
India faces a wider-than-expected monsoon deficit with rainfall in August, which accounts for around 30% of the season's rainfall, being 16% below normal across many parts of the country. The deficit has intensified with rainfall between June and August being around 14% below normal, against the full-season forecast of 10% below normal. According to India Meteorological Department director general Mrutyunjay Mohapatra, monsoon precipitation is expected to be less than 91% of the long-term average of 167.9 millimeters (6.6102 inches) in September. Most of the country is expected to get deficit rainfall, except some parts in east, northeast and central India. Kharif sowing has gained momentum following the intensification of monsoon rains across large parts of the country, although acreage remains below last year's level. The cumulative rainfall across the country from 1 June to 31 August stood at 603.7 mm, 13.8% below the normal, with the country receiving 213.3 mm of rainfall in August against the normal 254.9 mm.
Food prices are already showing signs of accelerating, with costs rising 5.5% in July versus a year earlier, which is the highest level this year and outstrips the growth across broader consumer prices. In a sign of growing strain, the government has allowed duty-free sugar imports for the first time in almost a decade to ease a domestic shortage. As of August 1, rice stocks were around three times the buffer norm, while wheat stocks were around 1.8 times the buffer norm. India's retail inflation accelerated to 4.45% in July, driven by higher food and fuel prices, according to provisional data from the ministry of statistics and programme implementation on 12 August. Food inflation stood at 5.52% in July, up from 5.32% in June. The Finance Ministry's MER noted that food prices, weather conditions and global uncertainties will need to be closely monitored in the coming months. According to Anjal Prakash, professor of public policy at FLAME University, a rainfall deficit could also delay preparations for rabi crops in some regions and add upside pressure to food inflation, particularly vegetables and edible oils.
The Finance Ministry's MER highlights the need to closely monitor three global developments - the sovereign bond market worldwide, the potential rise in the global average inflation rate due to higher prices of electronic goods and food items, and investment capital flows from across the world, including developed nations. India's external sector remains resilient, with comfortable foreign exchange reserves and efforts like BRICS engagement supporting stability. The report emphasizes that India's continued engagement through BRICS, including initiatives to expand intra-BRICS trade, strengthen MSME participation in international markets and build resilient global value chains, is expected to support export diversification and market access. Despite the external risks, the global economy remains uncertain because of growth, oil prices and different interest-rate policies, but India's economic fundamentals have remained relatively stable.
