Inflation worries shift from fuel to food as El Niño, weak monsoon emerge as key risks: BNP Paribas

India's inflation concerns are increasingly shifting from fuel prices to food costs, with the risks of an El Niño weather event and a weaker-than-normal monsoon emerging as key threats to price stability, according to a report by BNP Paribas. The brokerage said the recent decline in crude oil prices has improved the overall outlook, but weather-related disruptions could push food inflation higher and complicate the Reserve Bank of India's inflation management efforts.

Lower oil prices

The report noted that the recent US-Iran peace agreement has helped cool crude oil prices, providing relief from fuel-driven inflationary pressures. Lower oil prices are expected to reduce the cost of raw materials and ease pressure on the Indian rupee, thereby supporting consumption and improving business margins.

BNP Paribas stated that the overall economic outlook has improved compared to the previous month, largely due to softer crude prices. However, it warned that any rebound in oil prices remains a risk.

Food inflation

While energy prices have moderated, the focus has now shifted to food inflation. BNP Paribas said the possibility of a stronger El Niño event raises concerns over agricultural output and food prices.

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Reflecting these risks, the Reserve Bank of India (RBI) has raised its FY27 inflation forecast to 5.1% from 4.6%, according to the report. Higher commodity prices, rupee depreciation and the increase in fuel prices in May 2026 are also expected to add to inflationary pressures.

Weak monsoons

The report highlighted that the rural outlook this year will largely depend on the progress of the monsoon. The India Meteorological Department (IMD) has revised its monsoon forecast downward to 90% of normal rainfall from 92% earlier. Moreover, rainfall till June 16 was running around 28% below the long-term average.

A strong El Niño event has historically been associated with below-normal rainfall in India, which can affect crop production and drive up food prices. BNP Paribas said several rural indicators have already shown signs of weakness, with lower government spending, higher food inflation and slowing tractor sales weighing on sentiment.

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Consumption and employment indicators

The report pointed out that both urban and rural consumption indicators remain muted amid rising fuel prices, low economic activity and sluggish job market growth. Consumer confidence has weakened and private consumption growth has fallen to a one-year low. Labour-force participation has declined, while unemployment has risen year-on-year.

However, some positives remain. Credit growth and automobile sales have stayed resilient, and manufacturing activity has recovered from the weakness seen in March.

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Currency support may cushion risks

According to BNP Paribas, policy measures undertaken by the RBI and the government could attract between $50 billion and $70 billion in fresh foreign capital, helping contain near-term currency risks.

Even so, the brokerage cautioned that a resurgence in crude prices or a further deterioration in weather conditions could significantly alter the inflation outlook. As fuel-related worries ease, the progress of the monsoon and food prices are likely to dominate policymakers' attention in the months ahead.

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