Asia in Focus India Food Inflation Risks from El Niño Offset by Softer Core

Economics Research 17 August 2026 | 1:10AM IST

India: Food Inflation Risks from El Niño Offset by Softer Core

n Historically, El Niño has been linked to lower monsoon rainfall and higher food Santanu Sengupta | inflation in India, usually with a 2-8 month lag. In this cycle however, near-term Goldman Sachs India SPL impact on headline CPI should be smaller than in the past as, a) the new CPI Arjun Varma basket has a lower food weight, reducing pass-through from food-price | volatility; b) agriculture is less rainfall-dependent, with net irrigated area up Goldman Sachs India SPL

around 10pp since 2011; and c) record high inventories should help limit Andrew Tilton | cereals prices upside from lower production amid deficient rainfall in key rice Goldman Sachs (Asia) L.L.C. producing states and low reservoir levels in key wheat producing states.

n Pulses (legumes) screen as the most vulnerable crop: Based on crop concentration, irrigation coverage, rainfall volatility and crop inflation volatility, pulses screen as the most vulnerable crop, followed by wheat and vegetables. Weather conditions in key states including Uttar Pradesh, Punjab, Maharashtra and Madhya Pradesh will remain important to monitor. n Food inflation likely contained near term, with upside in CY27: We raise our food inflation forecast by 0.2pp to 5.1% yoy in CY26 and by 0.6pp to 6.3% yoy in FY27, mainly due to non-weather sensitive food items. We see upside to food inflation into CY27 from pulses and cereals, as production shortfalls and inventory drawdown this year could pressure prices, and expect food inflation to average 7.5% yoy in CY27. n Slower and lower rise in core inflation: With petrochemical prices below May highs, we expect incremental input-cost pass-through to be slower and lower than estimated earlier. We lower our core inflation forecasts for CY26 and FY27 by 0.2pp to 4.1% and 4.3% yoy, respectively, and expect core CPI inflation to average 4.1% yoy in CY27. n We keep our headline inflation forecast for CY26 and FY27 unchanged at 4.4% yoy and 4.9% yoy, as food upside is offset by core downside. We expect headline CPI inflation to peak in Q4 CY26, and average 5.3% yoy in CY27. Government employees’ pay revision under the 8th Pay Commission could pose upside risks to housing inflation in 2H CY27, but the MPC would likely look through the statistical impact. We continue to expect 50bp of cumulative policy rate hikes by the RBI, with 25bp each in December 2026 and February 2027.

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El Niño related food upside balanced by core downside India’s monsoon season is unfolding amid El Niño conditions, which may strengthen and develop into a ‘Super’ El Niño event. At during its August policy meeting, the RBI’s Monetary Policy Committee (MPC) flagged El Niño conditions and a sub-normal monsoon as key upside risks to inflation, underscoring the importance of weather-related shocks in India’s inflation dynamics. This is consistent with recent research by our colleagues on the EM economics team, which notes that inflation across Asian economies has been driven predominantly by local weather shocks and country-specific factors.

At the same time, concerns around core inflation from the Middle East shock appear to be easing. While the conflict initially raised the risk of broader input-cost pass-through, softer core goods momentum in the June and July CPI prints indicate a moderation in the incremental pass-through into core goods inflation. In this report, we reassess India’s inflation outlook, focusing on the likely impact of El Niño on food inflation and the evolving path of core inflation.

El Niño has historically raised food inflation in India with a lag

An El Niño1 is typically associated with lower southwest monsoon rainfall2 across India. Across the last three El Niño episodes, rainfall averaged around 8% below the long-period average, up to mid-August (Exhibit 1), vs. a deficit of around 12% as of August 13.

Historically, lower monsoon rainfall has generally translated…