El Niño and Uneven Monsoons May Push India's Food Inflation Higher in FY27: RBI Rate Hike Risk

India could face higher food inflation in FY27 as uneven monsoons and potential El Niño conditions threaten agricultural supplies, raising concerns over future RBI interest rate decisions.

El Niño and Uneven Monsoons May Push India's Food Inflation Higher in FY27

Rising Food Prices Could Complicate India's Inflation Outlook

India may face fresh inflationary pressures in FY27 as uneven monsoon rainfall and the possibility of El Niño conditions threaten agricultural production and food supplies. According to a report by Nuvama Institutional Equities, these weather-related risks could keep food inflation elevated and influence the Reserve Bank of India's (RBI) future monetary policy decisions.

Although overall inflation is expected to gradually moderate, the central bank may still consider another interest rate hike if price pressures remain persistent.

RBI May Keep Another Interest Rate Hike on the Table

The Nuvama report highlighted that India's inflation outlook remains uncertain despite expectations of easing price pressures. The RBI could consider additional monetary tightening if food prices continue to rise or inflation remains above comfortable levels.

The brokerage does not expect a particularly deep interest rate hiking cycle. However, it believes the RBI's policy guidance leaves room for another rate increase.

This suggests that the central bank will closely monitor inflation trends, particularly food prices, before making further decisions on interest rates.

India's Retail Inflation Rises to 6.1% in October

India's headline Consumer Price Index (CPI) inflation increased to 6.1% year-on-year in October, compared with 5.5% in September. This marked a two-year high, with the increase largely reflecting an unfavourable base effect.

Inflation stood at zero per cent during October last year, making the annual comparison appear significantly higher.

According to Nuvama, the increase was broadly in line with expectations and was primarily driven by food prices and statistical base effects rather than a sharp rise in underlying consumer demand.

Food Inflation Climbs to 8.5% Amid Monsoon Concerns

Food and beverages inflation increased to 8.5% in October from 7.4% in September. The rise highlights the continuing pressure on household food expenses.

Uneven monsoon rainfall has emerged as an important concern because irregular precipitation can affect crop production, agricultural yields and the availability of essential food items.

The possibility of El Niño conditions in FY27 could further complicate the situation by creating unfavourable weather patterns. If agricultural supplies are affected, food prices may remain under pressure for a longer period.

These developments could make food inflation one of the biggest challenges for India's economic outlook in the coming financial year.

Core Inflation Also Records a Moderate Increase

Apart from food prices, some underlying inflation indicators also increased in October.

Core CPI inflation, which excludes food and fuel prices, rose to 4.8% from 4.6% in September. Meanwhile, super-core inflation, which excludes food, fuel and commodities, increased to 3.8% from 3.2%.

The movement in these indicators suggests that certain price pressures are gradually building beyond the food and fuel categories.

However, Nuvama noted that overall demand-side inflationary pressures remain relatively contained.

Restaurant and Clothing Prices Add to Inflationary Pressure

Several consumer categories recorded higher inflation during October. Restaurant services inflation accelerated to 10.1% from 9.4% in September. Higher commercial LPG prices and rising raw material costs contributed to the increase.

Similarly, inflation in clothing and footwear climbed to 5% from 3.9%. Higher crude-linked raw material expenses and cotton prices were among the factors influencing costs in this category.

These increases indicate that consumers are facing higher expenses across multiple areas of everyday spending.

Inflation May Gradually Normalise During FY27

Despite the recent increase, Nuvama expects headline inflation to gradually moderate during FY27. The brokerage believes the impact of unfavourable base effects could diminish over time, while easing supply-side pressures may help stabilise consumer prices.

However, the outlook remains vulnerable to weather-related disruptions. Uneven monsoons and potential El Niño conditions could prevent food inflation from declining as quickly as expected.

The RBI will therefore need to balance economic growth considerations with its objective of maintaining price stability.

Conclusion

India's inflation outlook for FY27 will largely depend on food price movements, monsoon performance and global weather conditions. While inflation could gradually moderate as base effects fade, El Niño risks and uneven rainfall may keep food prices elevated. This uncertainty could encourage the RBI to maintain a cautious monetary policy approach, with another interest rate hike remaining a possibility if inflationary pressures persist.