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* The 2026 southwest monsoon season is ending as weak and highly uneven. AllIndia rainfall was 15% below the long-period average (LPA) as of 23rd Sep’26, but the national average masks large regional differences. East & Northeast India (- 27%) and Southern India (-26%) have seen the sharpest deficits, while Central India is relatively better placed at -6%. Among major states, rainfall deficit stands at 37% for Bihar, 30% for Karnataka, 27% for Kerala and 26% for Assam. Odisha is an important outlier with 18% above-normal rainfall. With the monsoon now withdrawing, the focus is shifting from the impact on standing kharif crops to soil moisture, reservoir levels and the availability of water for the rabi season.

* Kharif sowing has held up better than expected, but rice is a clear exception. Despite the weak monsoon, total kharif sowing reached 99.95m hectares as of 18th Sep’26, only 1.4% below last year and around 2% below normal. This is a significant improvement from the large sowing deficit seen earlier in the season and suggests that better rainfall during Jul-Aug’26 allowed farmers to catch up. Pulses acreage is up 1.5% YoY, coarse cereals acreage has increased marginally, and oilseed acreage is broadly unchanged. Rice, however, remains the key concern, with national acreage down 3.7% YoY. The decline is particularly sharp in Karnataka, Tamil Nadu, Maharashtra, Telangana and Andhra Pradesh. While government rice stocks are sufficient to provide a buffer against near-term supply pressure, not all stocks are necessarily available for immediate commercial release, given PDS commitments, stock quality and other operational considerations. Hence, the headline inventory number may overstate the quantity readily available to the open market. (See detailed discussion on Page 8).

* Water availability provides another important signal. Reservoir storage across 178 monitored reservoirs is at 71% of live capacity vs. 78.1% normally, implying a 9.1% deficit. However, the national picture masks a sharp regional divergence. Central and Western India remain comfortable, while Southern India is under significant stress, particularly Telangana, Andhra Pradesh and Tamil Nadu. Northern states such as Punjab and Rajasthan also face below-normal storage.

* Beyond rainfall and reservoir levels, soil moisture and drought indicators suggest that water stress is high across parts of the country. The drought footprint is relatively widespread, while root-zone soil moisture is below average in several agricultural areas. However, the impact is not uniform, as better soil moisture in parts of Central and Eastern India provides some buffer. Overall, the key concern is that weak residual moisture could limit crop yields and rabi sowing if post-monsoon rainfall remains deficient.

The national numbers, therefore, do not tell the full rural story. We assess each state in terms of rainfall, crop sowing, reservoir levels, soil moisture, drought conditions and CPI inflation. This allows us to identify where agricultural stress is likely to translate into weaker farm incomes and rural consumption, and where high inflation could further reduce purchasing power.

* The clearest stress cluster is Andhra Pradesh, Telangana, Karnataka and Tamil Nadu. These states face a combination of weak rainfall, poor soil moisture, stressed reservoirs and lower rice sowing. Importantly, they also have high rural inflation: 5.9% in Andhra Pradesh, 6.8% in Telangana, 5.7% in Karnataka and 6.1% in Tamil Nadu in Aug’26. This creates double pressure on rural households—weaker agricultural conditions on one side and higher living costs on the other.

* Maharashtra presents a different but important case. Aggregate reservoir storage is relatively comfortable, but soil moisture and drought indicators are weak and rice sowing is down 17.1%. Rural CPI inflation at 5.7% adds to the pressure. Punjab and Rajasthan are more important from a rabi perspective, given their weak rainfall and reservoir conditions. In contrast, Odisha, Uttar Pradesh and Chhattisgarh provide important buffers, with relatively better rainfall, soil moisture or reservoir conditions. The key message is that rural stress is concentrated rather than nationwide, and inflation can amplify the impact even in states where agricultural conditions are relatively better.

* Rural demand is resilient, but momentum is moderating. Rural demand remains relatively strong despite the weak monsoon, supported by government transfers, improving rural credit availability, higher irrigation coverage and the resilience of allied activities such as livestock and fisheries. High-frequency indicators such as tractor and two-wheeler sales continue to point to healthy underlying rural consumption. However, the outlook is becoming more mixed. Farmers are facing weaker terms of trade, while elevated food and input costs are gradually squeezing purchasing power. The impact is therefore likely to be more visible in discretionary rural consumption if crop yields weaken further or food inflation remains high. For now, we see moderation rather than a sharp rural demand slowdown

Outlook: Inflation to rise, growth to moderate and RBI to turn hawkish

The macro outlook is likely to become more challenging in 3QFY27, as the weak and uneven monsoon, alongside rising El Niño risks (very strong El Nino in Oct-Dec), could feed into food prices. At the same time, elevated crude prices and high input costs are adding pressure across transportation, energy and manufacturing, with WPI inflation already near 10%. With food inflation close to 6%, the risk is shifting from a temporary food-price movement to broader cost pressure and higher inflation expectations. A prolonged weather shock could push headline CPI above 6% in 3QFY27, particularly if rice and other key food prices remain elevated.

* Stress is concentrated rather than broad-based. Southern states, particularly Andhra Pradesh, Telangana, Karnataka and Tamil Nadu, are the key vulnerability cluster, where weak rainfall overlaps with poor soil moisture, stressed reservoirs and crop pressures. Maharashtra, Punjab and Rajasthan are additional pockets to watch out for, particularly as the risk shifts toward the rabi season.

* This creates a more difficult environment for the RBI. With liquidity already being absorbed from the banking system, the combination of higher food and energy inflation and tighter global financial conditions could raise prospects of a rate hike in Oct’26 policy. Under a persistent oil- and food-shock scenario, we see scope for a cumulative rate hike of 75-100bp over the cycle.

* The impact on growth is likely to become more visible in 4QFY27. Higher food prices would reduce real purchasing power, while tighter liquidity and higher borrowing costs could gradually weigh on credit-sensitive sectors and urban consumption. Rural demand should remain relatively resilient initially, but prolonged weakness in farm incomes, higher food prices and weaker terms of trade could eventually reduce discretionary spending. Hence, our base case is moderation rather than a sharp slowdown, with the balance of risks increasingly tilted toward weaker growth in 4QFY27 if high inflation persists.

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