The Biggest Risk For India's Markets Isn't Crude Oil, It's Monsoon

A below-normal monsoon has become the biggest domestic concern for India's economy and financial markets, according to the National Stock Exchange's (NSE) Market Pulse report for July 2026. While easing inflation and supportive monetary conditions have improved the broader macroeconomic environment, the report warns that deficient rainfall could hit agricultural output, squeeze rural incomes and reignite food inflation.

"For India, two forces continue to shape macro and markets through much of this year: West Asia and the South-West monsoon," the report said. It noted that while geopolitical tensions in West Asia have eased following the ceasefire, the focus has shifted to the monsoon. "The more immediate domestic risk now lies with the monsoon," it added.

El Niño is the main reason behind this year’s weak monsoon. It happens when Pacific Ocean surface waters warm up unusually, which often leads to less rain in India. The El Niño has worsened the monsoon, leaving rainfall patchy, dry spells longer, and distribution highly uneven across the southwest monsoon season.

Rainfall data points to the scale of the challenge. As of July 16, cumulative rainfall across the country was 24 per cent below the long-period average. The largest deficit was recorded in East and Northeast India at 36 per cent, followed by South Peninsula at 27 per cent and Northwest India at 22 per cent. Central India was the only region to receive above-normal rainfall during the period.

The report said the rainfall shortfall has already started affecting the kharif season. Reduced rainfall has impacted sowing in several parts of the country, raising the possibility of lower crop output if rainfall does not improve. That could hurt farm incomes and push up food prices, making it harder to keep inflation under control.

The monsoon is also closely tied to the outlook for monetary policy. According to the report, the balance between crude oil prices and rainfall will be crucial in determining the inflation trajectory over the coming months. While Brent crude has cooled after the ceasefire in West Asia, weaker rainfall could offset some of that relief by lifting food prices. "This interaction between oil and rain is now central to the policy balance," the report said.

Brent crude oil prices, which had once spiked to $126 a barrel, is now trading around $97. It had cooled to $72, the pre-war level, earlier this month.

The report cautioned that any prolonged weakness in the monsoon could reverse the recent moderation in inflation. Food prices are particularly vulnerable to weather-related disruptions during the kharif season, and a weaker harvest could spill over into household inflation even if global commodity prices remain benign. That would also weigh on consumption in rural areas, where farm incomes play a key role in spending.

There are, though, a few encouraging signs. Reservoir levels are broadly comfortable despite the rainfall deficit, offering some support to water availability for agriculture. Despite that, the report said the progress of the monsoon over the remaining weeks will be critical for crop production, inflation and the rural economy.