By mid-September, the monsoon was running about 15% below its long-term average, on track for the weakest season since 2009. The government has allowed duty-free sugar imports and is selling subsidised onions. El Niño may last into January.
In May, the India Meteorological Department forecast a monsoon about 10% below normal. By mid-September, the shortfall was closer to 15%. If that holds through the end of the season, it will be India’s weakest monsoon since 2009, when rainfall fell 18% short. El Niño has strengthened as expected, and some forecasters now think a strong version could persist into January.
From missing rain to rising prices
A weak monsoon hits prices through several channels at once. Smaller harvests of pulses, oilseeds and vegetables mean less supply. Lower reservoir levels reduce the water available for irrigation. Farmers, earning less, buy less. The first signs are already visible: food inflation has climbed back above 5%, and onion prices have more than doubled from a year ago.
How the government cushions it
India keeps large buffer stocks of rice and wheat, so cereal prices should stay relatively stable. For other items, the government is using trade and direct sales. It has allowed duty-free imports of sugar, and some states are selling onions at subsidised prices through government outlets. These measures blunt the price spikes but cannot fully replace a missing harvest.
Buffer stocks can protect the price of rice. They cannot conjure onions out of a dry field.
The second crop
The bigger worry is the rabi season. Wheat, mustard and chickpeas are sown in October and November and depend on soil moisture and reservoirs topped up by the monsoon. A prolonged El Niño would mean a drier winter as well. Economists estimate that each percentage point of rainfall shortfall adds a fraction of a point to food inflation, and the effect can stretch over many months. For the RBI, which meets in early October, the monsoon has become as important a variable as the price of oil.
Sources: India Meteorological Department; Ministry of Consumer Affairs; Kotak Mutual Fund estimates.
- Monsoon rainfall was about 15% below the long-period average by mid-September.
- The worst year in recent memory was 2009, with an 18% shortfall.
- The government allowed duty-free sugar imports and is selling subsidised onions in some states.
- If El Niño lasts into January, it could also hurt the winter rabi crop.
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