Monsoon deficit, El Niño and inflation: Report flags India's biggest economic risks

India's economy is entering the second half of 2026 with two contrasting trends. On one hand, the banking system is in its strongest shape in years, with bad loans at multi-decade lows and credit quality improving across most segments. On the other, an unusually weak monsoon, driven by strengthening El Niño conditions, is emerging as the biggest threat to inflation and agricultural output. 

That is the central message of 360 ONE Asset's July 2026 Panorama report, which warns that while financial stability remains intact, weather-related risks could reshape the inflation outlook and influence the Reserve Bank of India's policy decisions in the coming months. 

The report says the southwest monsoon made a brief recovery during the first week of July after an exceptionally weak June, but the improvement proved short-lived. As of July 22, cumulative rainfall remained 19% below normal, with rainfall deficits widening again after mid-July. 

The shortfall is widespread rather than localised. Twenty of India's 36 meteorological subdivisions — covering 54% of the country's land area — are experiencing deficient rainfall. The worst-hit regions are the East and North-East, where rainfall is down 32%, followed by the South Peninsula, which has recorded a 26% deficit. 

According to the report, strengthening El Niño conditions are playing a major role in suppressing rainfall and are expected to intensify further over the coming months, keeping pressure on the monsoon through the rest of the season. 

Agriculture faces pressure, but food buffers offer relief 

The weak rains are already showing up in farm activity. Kharif sowing stood at 59.6% of the normal sown area as of July 17, trailing the four-year average of 63.7%. Every major crop category — from rice and pulses to oilseeds and coarse cereals — is behind its typical pace. 

Despite this, the report strikes a cautiously optimistic note on food security. Reservoir storage remains close to normal in most parts of the country, although southern India is under greater stress. More importantly, the Food Corporation of India (FCI) continues to hold wheat and rice stocks well above strategic reserve requirements, giving the government room to intervene if food prices accelerate. 

RBI expected to stay on hold 

Inflation has already begun edging higher, driven largely by food and fuel prices. The report notes that while headline consumer inflation has picked up, underlying core inflation — particularly after excluding gold and silver — remains relatively subdued at 2.5%, suggesting broader price pressures are still contained. 

Given the uncertainty surrounding the monsoon and geopolitical developments in West Asia, 360 ONE expects the Reserve Bank of India to maintain the policy status quo in the near term while monitoring the evolving growth-inflation balance. 

Banking sector remains a bright spot 

While agriculture faces headwinds, India's banking system continues to strengthen. The report highlights that the banking sector's Gross Non-Performing Asset (GNPA) ratio has fallen to 1.8% as of March 2026, down from 2.3% a year earlier — the lowest level in decades. RBI stress tests also suggest that even under adverse scenarios, asset quality would deteriorate only modestly through 2028. 

Consumer credit quality has also improved across banks, NBFCs and housing finance companies, with lower loan slippages and stronger recoveries. Public sector banks continue to carry relatively higher consumer loan NPAs than private lenders, but the overall trend remains favourable. 

Small loans under pressure 

Not every corner of the credit market is equally healthy. The report identifies small-ticket personal loans below ₹50,000 as the biggest area of concern, particularly among fintech lenders that account for more than half of the segment. Delinquencies continue to rise in this category despite broader improvements elsewhere. 

Gold loans, meanwhile, continue to expand rapidly — not because of new borrowers but because existing customers are leveraging higher gold prices to borrow larger amounts and refinance older debt. 

MSMEs hold firm, microfinance shows recovery signs 

The report says MSME lending remains robust, with overall loan growth of 22.8% in March 2026, led by strong expansion in the micro-enterprise segment. However, early warning signals are beginning to emerge, with rising stress in smaller businesses reflected in higher SMA-1 accounts. 

Microfinance also appears to be stabilising after an extended slowdown. Outstanding credit has increased modestly for the first time after seven consecutive quarters of decline, while borrower stress indicators — including overdue loans and multiple-lender exposure — have continued to improve.