Monsoon recovery brightens economic outlook despite near-term inflation risks: Bajaj AMC

The recovery in India's southwest monsoon has improved the country's economic outlook despite the likelihood of higher food inflation in the near term, according to an analysis by Bajaj Asset Management Company (AMC). 

While cumulative rainfall remains 16% below the long-term average due to uneven regional distribution, rainfall has picked up significantly in recent weeks. Bajaj AMC said the improvement is expected to support kharif sowing in the coming weeks, although the sown area still remains below last year's level. 

The fund house noted that the progress of the monsoon during July, August and September will be critical in determining its impact on agricultural output, inflation and overall economic growth. 

According to the analysis, temporary supply-side disruptions may keep food prices elevated in the near term. However, improving rainfall, comfortable foodgrain stocks, resilient rural indicators, and a supportive interest rate environment are expected to prevent the delayed monsoon from becoming a broader economic challenge. 

Drawing on historical trends, Bajaj AMC said the onset of the monsoon does not necessarily determine the outcome of the season. It cited 1926 as an example, when one of the weakest starts on record was followed by a strong recovery in July-September, with rainfall eventually ending 11% above normal. 

The report also noted that consecutive years of deficient rainfall typically have a more severe impact on farm incomes, rural consumption and economic growth than a single delayed monsoon. 

Rural economy remains resilient 

The analysis highlighted that a weak monsoon initially affects agricultural production, leading to lower farm incomes and weaker rural consumption, with ripple effects on sectors such as tractors, two-wheelers, fertilisers and consumer staples. Lower rural demand can eventually weigh on economic growth, food inflation and corporate earnings. 

However, Bajaj AMC said the current situation appears more favourable than previous drought years. Rainfall recovered sharply during the final week of June and throughout July, while reservoir storage remains at comfortable levels and most river basins are close to or above their long-term averages. 

India's foodgrain stocks are currently around five times the prescribed buffer level, providing policymakers with adequate room to manage cereal inflation if required. 

The report also pointed to resilient rural indicators. Tractor sales rose 19% year-on-year in May, agricultural credit growth accelerated to nearly 15%, and robust non-farm income continued to support household spending despite delayed sowing. 

CPI inflation seen at 5-5.5% in FY27 

Bajaj AMC expects consumer price index (CPI) inflation to average 5-5.5% in FY27, driven largely by temporary food supply pressures. 

Despite the expected rise in headline inflation, the fund house said underlying inflation remains contained, giving the Reserve Bank of India (RBI) room to keep the repo rate unchanged over the next few months. 

Stable policy rates are expected to keep bond yields anchored, while an improvement in rural demand could benefit sectors such as agricultural inputs, farm equipment, rural-focused automobile companies and consumer staples. 

The report added that stronger rural consumption could also improve market sentiment, which has remained under pressure due to geopolitical tensions and elevated crude oil prices. "If rainfall maintains its momentum through August and September, concerns over a deficient monsoon could fade, with 2026 ultimately emerging as a delayed but recovering monsoon year," the analysis said.