India's monsoon deficit persists, raising food inflation risks; RBI likely to stay on hold: 360 ONE Asset

India's southwest monsoon continues to remain mainly below normal, raising concerns over kharif crop output and food inflation, according to the latest Panorama report by 360 ONE Asset. While rainfall recovered briefly in early July after a weak June, it subsequently lost momentum, leaving the overall seasonal deficit elevated. 

As of July 22, the monsoon rainfall deficit stood at 19%, after narrowing to 14% on July 9 before widening again to 24% by July 17. Rainfall had ended June with a steep 40% deficit. 

The report noted that deficient rainfall persists across 20 of India's 36 meteorological subdivisions, covering 54% of the country's land area. All four major regions remain in deficit, with the East & North-East and South Peninsula the worst affected, reporting rainfall shortfalls of 32% and 26%, respectively. 

According to the report, strengthening El Niño conditions have weakened the monsoon and are expected to intensify further in the coming months, posing additional downside risks to agricultural production. 

Kharif sowing remains weak 

Weak rainfall has slowed kharif sowing across all major crops. As of July 17, kharif sowing had reached 59.6% of the normal sown area, compared with the four-year average of 63.7%. 

Despite the rainfall deficit, reservoir storage remains above or close to normal across most regions, although levels are below those seen last year. Southern India remains an exception, with relatively weaker reservoir storage. 

Food inflation risks rise 

The report said higher food and fuel prices have already contributed to a pick-up in retail inflation. However, underlying price pressures remain contained, with core inflation excluding gold and silver staying benign at 2.5%. 

A prolonged weak monsoon could hurt kharif crop production and increase upside risks to food inflation. Nevertheless, adequate foodgrain stocks with the Food Corporation of India (FCI) provide sufficient room for government intervention to stabilise food prices if required. 

Given the uncertainty surrounding the monsoon and geopolitical developments in West Asia, the report expects the Reserve Bank of India (RBI) to keep policy rates unchanged in the near term. 

Banking sector remains resilient 

The report highlighted continued improvement in the health of India's banking sector, with the gross non-performing asset (GNPA) ratio declining to a multi-decade low of 1.8% in March 2026 from 2.3% a year earlier. 

RBI stress tests suggest that asset quality is likely to remain stable under the baseline scenario. Even under adverse stress conditions, the GNPA ratio is projected to rise only marginally to 4.1% by March 2028. 

Credit quality improved across major sectors, although agriculture continued to report the highest GNPA ratio at 5.1% and accounted for 37.2% of total gross NPAs as of March 2026. 

Consumer credit, MSMEs show mixed trends 

The report said asset quality in consumer lending improved across lender categories, supported by lower slippages and steady loan upgrades. However, public sector banks continued to report relatively higher GNPA ratios in consumer credit. 

Across product segments, GNPA ratios declined, though unsecured business loans continued to exhibit relatively weaker asset quality. Small-ticket personal loans also remained under pressure, particularly among fintech lenders. 

Gold loan growth continued to accelerate, driven largely by existing borrowers taking advantage of higher gold prices to secure larger loans and roll over outstanding debt. Rising gold prices have also resulted in lower loan-to-value (LTV) ratios across banks and non-banking financial companies (NBFCs). 

MSME lending remained robust, with loan growth of 22.8% in March 2026, led by the micro segment, which expanded 28.8%. However, early signs of stress have begun to emerge in micro enterprises, reflected in higher SMA-1 (31-60 days past due) accounts. 

Meanwhile, the microfinance sector recorded a marginal increase in credit for the first time after seven consecutive quarters of decline, although the borrower base continued to shrink. Asset quality improved further, with lower delinquencies and a decline in borrowers servicing loans from three or more lenders, indicating easing repayment stress.