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Informist, Monday, Aug. 31, 2026

NEW DELHI – India needs to closely monitor risks arising from El Nino conditions and higher input cost pressures due to the war in West Asia, the finance ministry said Monday. The ministry also cautioned on the outlook for domestic food inflation and agricultural output, with intensifying El Nino expected to peak in late 2026.

Despite expansionary business expectations, near-term business sentiment and input-cost pressures warrant monitoring, the ministry said in its monthly economic review for August. "...food prices, weather conditions and global uncertainties will need to be closely monitored in the coming months."

"Elevated food inflation, by absorbing a larger share of household disposable income, could constrain spending on non-food discretionary items, thereby limiting the extent to which cost-side pressures are passed through to final consumer prices," the ministry said in the report. El Nino is likely to pose downside risks to crop yields during the late-August flowering and grain-formation stages while also affecting soil moisture and the winter temperatures required for the upcoming Rabi crops.

"Kharif sowing has gained momentum following the intensification of monsoon rains across large parts of the country, although acreage remains below last year's level," it added. India received 16.3% below-normal rainfall in August at 213.3 millimetres, with the southern region of the country getting 27% below-normal rains at 139.1 millimetres. All other regions also received below-normal rains this month.

The emergence and persistence of El Nino conditions warrant close monitoring given their implications for rainfall, crop outcomes, and food inflation, the ministry said. "...easing cost pressures and firm demand conditions are expected to support activity, although the external environment remains a key source of uncertainty."

Headline inflation, which averaged 3.9% in the June quarter, further inched up to 4.45% in July from 4.38% in June. Inflation was mainly higher due to higher food inflation, led by protein-rich foods, processed products, cereals, and imported edible oils. However, the pressure on food inflation eased slightly due to softening of vegetable prices, the report said. "Inflation remained concentrated in a limited set of supply-sensitive categories, prompting policy measures to ease cost pressures and ensure adequate supplies."

GROWTH AMID WAR

The global economy is expected to remain resilient in the second half of 2026, even as growth is likely to be "uneven" due to a challenging situation amid the war. The economy remains uncertain because of growth, oil prices, and different interest-rate policies, the ministry said. These external developments continued to influence the domestic economic outlook in August.

India faced higher price pressures since the outbreak of the war. The war also led to a surge in global crude oil prices to as much as $123 a barrel from a pre-war level of sub-$73 a barrel. This was also seen in India's current account deficit, which widened marginally to USD 3.1 billion in Apr-Jun from $2.9 billion in the corresponding period a year ago. "This decline was driven by a larger merchandise trade deficit, which outweighed a resilient services surplus and consistent transfer receipts," the report said. "Overall, the external sector remains well-positioned to absorb the pressures arising from the changing global trade dynamics and volatile global financial conditions."

Despite these external risks, India's economic activity, inflation, and external position have remained relatively stable. Even the domestic high-frequency indicators continue to show resilience, the ministry said. 

Earlier in the day, the statistics ministry released data showing India's GDP rose 7.8% in Apr-Jun mainly due to higher growth in the services and manufacturing sectors. The Indian economy had grown 8.6% in the March quarter and 6.8% in the year-ago quarter. 

LOOKING AHEAD

The finance ministry said it is closely tracking sovereign bond markets worldwide as the rise in yields can cut both ways. "Our bond yields can rise in tandem. Or, if they don't, the spread compression can put pressure on the domestic currency," the report said.

Further, the ministry is monitoring how central banks in developed countries are acting in regard to inflation. "These will have implications for our monetary policy, domestic interest rates and the financing of the current account deficit," it added.  End

Reported by Shweta

Edited by Pankaj Aher

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