A robust monsoon is a godsend for India’s agriculture-driven economy. With the India Meteorological Department (IMD) forecasting bountiful rainfall, Ind-Ra projects a 4% year-on-year growth in agricultural gross value added (GVA) for FY26, building on the success of Kharif and Rabi crops in 2024.
This is critical because agriculture accounts for nearly 15% of India’s GDP and employs over 40% of its workforce. Higher crop yields—especially in food grains—could stabilize supply chains, keeping food prices in check. Food inflation, a significant driver of India’s Consumer Price Index (CPI), has been a persistent headache for policymakers, often hovering above the RBI’s 4% target. In FY25, CPI inflation averaged around 4.5-5%, with spikes driven by volatile vegetable and pulse prices.
An above-normal monsoon could ease these pressures by ensuring ample supply of cereals, pulses, and vegetables. Ind-Ra’s optimism about inflation staying close to the RBI’s 4% target hinges on this. Lower food prices would not only cool headline inflation but also boost rural consumption, as higher farm incomes translate into greater purchasing power.
This is particularly significant given the report’s note that increased irrigation and a higher share of non-crop agricultural activities have reduced the sector’s vulnerability to monsoon vagaries. If the monsoon delivers as expected, we could see a virtuous cycle of stable prices and stronger demand, potentially keeping CPI inflation within the RBI’s 2-6% tolerance band.
The Catch: Spatial Distribution and Climate Risks
However, the Ind-Ra report wisely cautions that the monsoon’s benefits depend on its spatial and temporal distribution. The IMD’s forecast of below-normal rainfall in parts of Northwest India, Northeast India, and South Peninsular India raises red flags. South Peninsular India, in particular, remains vulnerable despite improved irrigation, as per Ind-Ra’s analysis.
Uneven rainfall or extreme weather events—think flash floods or prolonged dry spells—could disrupt crop production in these regions, leading to localized supply shocks. For instance, a poor monsoon in South India could hit rice and pulse output, pushing up prices and offsetting gains elsewhere.
Climate change adds another layer of uncertainty. Erratic weather patterns, as seen in recent years, could undermine the IMD’s rosy projections. If rainfall is poorly distributed or if heatwaves and floods strike key agricultural zones, the projected 4% agricultural GVA growth could falter, reigniting food inflation. This would keep the RBI on edge, as it has repeatedly cited supply-side shocks as a reason for maintaining a hawkish stance.
Monetary Policy Implications
The RBI’s monetary policy is intricately tied to inflation dynamics. In FY25, the RBI held the repo rate steady at 6.5%, prioritizing inflation control over growth stimulus, even as global peers like the US Federal Reserve began easing rates. However, a favorable monsoon in 2025 could shift the calculus. If inflation trends closer to 4%—as Ind-Ra suggests—due to stable food prices, the RBI might find room for monetary easing in FY26.
A rate cut, even a modest 25-50 basis points, could stimulate investment and consumption, especially in a global environment clouded by trade tensions and reciprocal tariffs, as noted by Ind-Ra’s Chief Economist, Dr. Devendra Kumar Pant.
Lower interest rates would be a boon for India’s growth story, particularly for rate-sensitive sectors like real estate, auto, and manufacturing. Rural demand, already poised to benefit from higher farm incomes, would get an additional boost from cheaper credit.
However, the RBI will tread cautiously. Governor Shaktikanta Das has emphasized a data-driven approach, and any hint of monsoon-related supply disruptions or global commodity price spikes (e.g., oil or fertilizers) could delay rate cuts. The central bank’s focus on anchoring inflation expectations means it will prioritize sustained stability over premature easing.
The Bigger Picture
The monsoon’s impact extends beyond inflation and monetary policy. A strong agricultural performance could help India weather external headwinds, such as global trade wars or geopolitical shocks, by strengthening domestic consumption.
With two good crop seasons already in the bag for FY25 and the promise of another in FY26, rural India could emerge as a key growth driver. This aligns with Ind-Ra’s view that a good monsoon augurs well for consumption growth, a critical component of India’s GDP.
Yet, the RBI and policymakers must remain vigilant. Investments in irrigation, storage, and supply chain infrastructure are crucial to mitigate the risks of uneven rainfall and climate shocks. The government’s push for crop diversification and non-crop agricultural activities, as highlighted by Ind-Ra, is a step in the right direction, but execution will be key.
The 2025 monsoon forecast is a beacon of hope for India’s economy, promising to tame inflation and create space for monetary easing. If rainfall is well-distributed and climate risks are contained, the projected 4% agricultural growth could anchor CPI inflation near 4%, giving the RBI confidence to lower rates in FY26. This would catalyze growth while shielding India from global economic turbulence. However, uneven rainfall or weather shocks could upend this optimism, keeping inflation elevated and the RBI hawkish. As the monsoon clouds gather, all eyes will be on the skies—and the RBI’s next move.