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Informist, Monday, Jul. 6, 2026

 

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--S&P: India rural economy faces dry monsoon, higher agri-input costs 
--S&P: India farmers face lower ylds, incomes; to have effect on food prices 
--S&P: Lower farm yields, income to hit demand for two-wheelers, tractors 
--S&P: See dip in agri-linked asset quality for lenders; microfin vulnerable
--S&P: Non-agri growth engines emerging, India financial system resilient
--S&P: Weak monsoon to strain India fiscal balances
--S&P: Hydroelectric generation could decline by 10-15% due to weak monsoon 
--S&P: See limited earnings impact on India bks from weak monsoon

 

NEW DELHI – S&P Global Ratings Monday said a weak monsoon in India could drive up inflation, weaken rural demand and strain the country's fiscal balances. The agriculture sector would face a double whammy from a weak southwest monsoon and higher input costs due to the war in West Asia, the rating agency said in a report. However, financial institutions lending to the rural economy may only face a limited impact. 

 

The India Meteorological Department has projected the southwest monsoon rainfall to be below normal at 90% of the long-period average. The deficit in June was 38%, before a recovery seen so far in early July. S&P said that agricultural yields and farmers' incomes are likely to fall as a result, with knock-on effects such as higher food prices.

 

The weak monsoon could also reduce hydroelectric power generation by 10-15%. The agrochemicals sector is vulnerable to the dip in the rural economy, along with tractor and two-wheeler manufacturers, the rating agency said. S&P sees slower credit growth and a modest deterioration in asset quality for India's banking sector, driven by impacts on the agricultural sector. However, banks are likely to see a limited impact on earnings, while microfinance institutions are more vulnerable due to their greater rural exposure and weaker borrower profiles, the rating agency said.

 

"Other non-agricultural growth engines are emerging in India, and the financial system remains resilient," said credit analyst Geeta Chugh. "Prudent underwriting and regulatory agility should contain broader credit risks, even if the monsoon fails to deliver."

 

As inflation rises, the ratings agency expects the Reserve Bank of India to maintain moderately tight monetary policy stance, dampening economic activity. S&P projects India's CPI inflation to average 5.1% in 2026-27 (Apr-Mar), the same as the central bank's forecast. The latest reading showed retail inflation at 3.93% in May, lower than the RBI's medium-term target of 4%.

 

While historically weaker monsoons have led to sharp increases in inflation in India, the impact could be lower this time around as the economy shifts away from agriculture. Large public food grains stocks and the public distribution system also help limit food price spikes, S&P noted. On the demand side, rural employment guarantee schemes may bridge the shortfall from a decline in agricultural activity.

 

The fiscal impact would depend on the scope of the shortfall in rainfall, the report said. However, the ratings agency warned tighter monetary policy to combat food inflation would raise funding costs and put pressure on an already high interest-to-revenue ratio for the government. Interest payments are around 40% of the Centre's target for revenue receipts, according to the Union Budget for FY27. 

 

S&P does not expect a large impact on the government's fiscal position with only the projected 10% dip in average rainfall. The government is likely to expand its subsidy bills on food and fertilisers while widening rural employment guarantee scheme if further support is needed. The Centre is targetting a fiscal deficit of 4.3% of GDP in FY27, down from 4.4% in the financial year ended March.

 

"A larger shortfall that spurs a sustained food price shock could prompt both central and state governments to provide broad-based support measures, which could derail fiscal consolidation plans," the report said. 

 

The corporate sector is likely to be insulated from the weak monsoon, S&P said, with only 5% of rated companies expected to face a hit to demand. Less than 10% of the top 150 Indian companies by earnings before interest, depreciation and amortisation would face an impact due to strong earnings momentum and solid balance sheets. 

 

"Within the rated space, agrochemical company UPL Corp. Ltd. and Tata Motors Ltd. (the commercial vehicles business of the Tata Group) may face a dip in demand," the report said. "A drop in crop yields due to severe El Nino conditions could strain farm income and lower demand for crop-protection products."

 

For UPL, the Indian business makes up less than 10% of revenue and its Latin America business will be the key driver, S&P said. Tata Motors will be able to navigate any short-term squeeze on operating performance due to its strong balance sheet position, the ratings agency said.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Aaryan Khanna

Edited by Saji George Titus and Akul Nishant Akhoury

 

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