NEW DELHI, June 14: Inflation in India has a high probability of rising beyond the Reserve Bank of India’s target range in the second half of the 2026-27 financial year, with the potential to exceed the central bank’s upper tolerance band of 6 percent, according to brokerage firm Prabhudas Lilladher.
As El Niño combines with geopolitical supply chain disruptions to pressure food and input prices, the brokerage flagged deficient monsoons, low reservoir levels, and elevated crude-linked costs as key risks.
“Given this backdrop and the current macroeconomic and geopolitical environment, we expect a spike in inflation, which can even go beyond RBI’s upper band of 6 percent in 2H27,” the brokerage said in its June 12 research report.
The firm noted that both the India Meteorological Department (IMD) and Skymet have forecast El Niño conditions during this year’s monsoon season, with the IMD projecting rainfall at 90 percent of the Long Period Average (LPA) and Skymet forecasting 94 percent of the LPA.
June rainfall is expected to reach 92 percent of the LPA, while rainfall in August is likely to weaken further.
“The outlook suggests a higher probability of rainfall deficits in North, West, and Central India, while East and Northeast India may fare comparatively better,” the report said.
Water storage levels are currently 10 percent lower year-over-year in this El Niño year, and “intense heat is likely to add to crop loss and inflation,” the brokerage said.
While the impact of El Niño on agricultural output has diminished due to improved irrigation, Kharif production still declined by 22 percent, 11.7 percent, and 12 percent in FY2003, FY2005, and FY2010, respectively.
Even in recent El Niño years, agricultural output fell by 2.3 percent in FY2016 and remained flat in FY2024, indicating that rainfall distribution and irrigation infrastructure now play a more significant role.
Still, Prabhudas Lilladher said El Niño alone is not the sole driver of inflation, but it has coincided with sharp price increases in years such as FY2010 and FY2013.
The brokerage sees inflation risks intensifying.
“We believe that the probability of inflation shooting through RBI targets remains high, given that we had negative food inflation starting in June 2025 and geopolitical uncertainties have not only disturbed supply chains but also led to a spike in prices of key crude-based inputs,” it said.
Data show no direct one-to-one relationship between consumer price inflation and El Niño, but years such as FY2009, FY2012, and FY2013 witnessed sharp increases in inflation due to global disruptions and crude price spikes alongside weak monsoons.
Prabhudas Lilladher expects the secondary effects of high crude prices and disrupted supply chains to weigh on demand in the coming months.
With reservoir levels declining and August rains expected to weaken, food inflation could accelerate just as favorable base effects begin to fade. Unless monsoon distribution improves or geopolitical tensions ease, the firm expects an upward bias in inflation through the second half of FY2026-27.
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