Two of the most consequential economic data points released in the past 24 hours have not yet been read together by most analysts and most media coverage. The first is Skymet Weather’s forecast that India’s 2026 southwest monsoon will deliver below normal rainfall at 94 percent of the long period average, with El Niño strengthening through the second half to push September to just 89 percent of normal. The second is Monday’s HSBC India Services PMI report showing that input price inflation across India’s private sector surged to its fastest pace in 45 months in March 2026, driven explicitly by the Iran war’s impact on fuel, transport, and logistics costs.
Read separately, each of these is a serious economic concern. Read together, they describe a collision between two independent inflation drivers arriving simultaneously at a moment when the Reserve Bank of India has essentially no good policy options available.
The 45-Month High Input Inflation — What the PMI Data Actually Said
The HSBC India Services PMI for March 2026, released Monday morning, delivered the most alarming cost data point in nearly four years. Input price inflation across India’s services sector surged to its fastest pace since June 2022, the 45-month high. Panel members, the actual business owners and managers surveyed by S&P Global, identified specific items whose prices had risen since February: chicken, cooking oil, eggs, electricity, fish, fruits, fuel, labour, meat, and vegetables.
The fuel and electricity components are the Iran war’s direct economic transmission into the Indian private sector. With Brent crude above $110 per barrel and WTI hitting a 52-week high of $115.71 today, every Indian business that uses vehicles, generators, air conditioning, cooking equipment, or any energy-dependent process has seen its input costs surge since February 28. Airlines, logistics companies, restaurants, hotels, hospitals, factories, and farms are all paying more for energy than they were before the war began, and that cost is feeding into every product and service price in the Indian economy.
The food items in the PMI’s cost increase list, chicken, eggs, fish, fruits, and vegetables, are not primarily energy costs. They are early warning signals of food inflation that is building in the system through multiple channels simultaneously: higher transport costs making food distribution more expensive, higher agricultural input costs raising farm-gate prices, and rupee weakness at 95 per dollar making any imported food ingredient more expensive in rupee terms.
This is the baseline inflation environment into which the Skymet monsoon forecast has just been delivered.
The Monsoon Forecast — What It Means for Food Prices Specifically
A monsoon at 94 percent of the long period average with El Niño expected to push August to 92 percent and September to 89 percent is not a drought forecast. India has survived worse. The 2009 monsoon delivered just 77 percent of normal rainfall and the economy absorbed it, partly through buffer stocks, partly through imports, and partly through government support programmes. The 2002 monsoon was similarly severe.
But the 2009 and 2002 food inflation shocks arrived in environments where energy prices were not already at crisis levels, where input cost inflation was not already at 45-month highs, where the rupee was not at a record low, and where fiscal headroom for government support programmes was not already being consumed by war-related economic management.
The below normal monsoon’s food inflation transmission works through several channels that will compound the existing cost pressures rather than operating independently of them.
Kharif output in north, west, and central India, the regions Skymet specifically identifies as facing below normal rainfall, will be reduced if the forecast materialises. Lower kharif output of paddy, pulses, oilseeds, and cotton means tighter domestic supply at a time when import substitution is already more expensive due to the rupee’s weakness. India importing more edible oil, pulses, or cotton to compensate for domestic shortfalls means paying in dollars at 95 per dollar rather than the 83 per dollar that prevailed before the Iran war began. The rupee depreciation amplifies every import bill by approximately 14 percent compared to pre-war levels.
Reservoir storage going into the rabi season, already affected by last year’s below normal performance in parts of India, will be further challenged if August and September deliver at 92 and 89 percent of normal. Lower reservoir storage means less irrigation water available for rabi wheat, the crop that most directly determines India’s food security position. A weak rabi following a weak kharif is the sequence that produces genuine food price emergencies rather than manageable seasonal fluctuations.
The agricultural input cost channel runs in the other direction too. Farmers in deficit rainfall regions who receive less water will need more irrigation, which means more electricity for pumps at current elevated electricity prices, more diesel for generators at current elevated fuel prices, and potentially more fertiliser applied in compensatory doses to maintain yields under water stress, all at elevated prices driven by the Iran war’s impact on the natural gas and petrochemical supply chain.
The RBI’s Impossible Position
The combination of 45-month high input cost inflation from the Iran war and below normal monsoon-driven food inflation arriving simultaneously creates what monetary economists call a stagflation trap of unusual severity.
The textbook response to slowing growth, which India’s Composite PMI falling to a three-and-a-half-year low of 57.0 in March signals, is monetary easing, rate cuts to stimulate demand and investment. The textbook response to surging inflation, which 45-month high input costs and a below normal monsoon together describe, is monetary tightening, rate hikes to reduce demand and anchor inflationary expectations.
These two prescriptions are directly contradictory. The RBI cannot simultaneously cut rates to support growth and raise rates to fight inflation. It must choose, and every choice involves accepting significant damage on one dimension.
The choice is made even harder by the external context. The US Federal Reserve has completely abandoned rate cut expectations for 2026, as markets now price zero cuts through the year, due to the Iran war’s energy-driven inflation impact on the US economy. If the RBI cuts rates while the Fed holds or raises, the interest rate differential between Indian and US assets narrows, making Indian assets less attractive to foreign portfolio investors, adding further pressure to the rupee that is already at 95 per dollar, which further worsens import costs, which further feeds domestic inflation.
The RBI is therefore trapped between domestic growth weakness that argues for cuts, domestic inflation that argues against cuts, and external currency dynamics that make cuts dangerous. A below normal monsoon adding food inflation to this equation does not change the trap. It tightens it.
The Government’s Fiscal Pressure Compounds
For North Block, the Skymet forecast arriving on the same day as the PMI’s 45-month high inflation reading creates a fiscal management challenge that has no easy solution.
A below normal monsoon typically requires the government to activate a range of agricultural support mechanisms: enhanced Minimum Support Prices to protect farmer incomes, expanded crop insurance payouts through PM Fasal Bima Yojana, enhanced Pradhan Mantri Gram Sadak Yojana allocations for rural connectivity, and in severe cases, expanded MGNREGS allocations to provide rural employment when agricultural income falls.
Each of these mechanisms requires fiscal expenditure at a time when the Iran war is already creating additional spending demands through higher petroleum subsidy costs, OMC support for petrol and diesel price management, LPG cylinder subsidy expansion, and the general fiscal drag of an economy growing below its potential due to the conflict’s disruption.
The state government borrowings calendar of Rs 2,54,509 crore for April to June 2026 already reflected states’ borrowing needs before the monsoon forecast was available. State agriculture and rural development departments will now need to review their contingency budgets for below normal monsoon scenarios, particularly in the north, west, and central Indian states Skymet identifies as facing deficit rainfall.
The One Positive and Why It Matters
In the middle of this convergence of pressures, the Skymet forecast contains one genuinely positive data point that deserves to be recognised. June is forecast at 101 percent of the long period average, above normal for the monsoon’s opening month.
A strong June opening does two things that matter economically. It ensures that kharif sowing begins on schedule and with adequate initial soil moisture across most of India, establishing the crop stand before the El Niño-driven deterioration sets in from July onwards. And it allows reservoir systems to begin the season with above-average inflows before the August and September deficits reduce the replenishment rate.
The six-week window between now and the monsoon’s June arrival is therefore the most important period for agricultural preparation. Farmers who plant drought-resistant kharif varieties, secure crop insurance coverage, and front-load their input purchases before monsoon onset will be better positioned to absorb the second-half weakness than those who do not. Government agencies that begin reservoir management protocols and drought contingency planning in April and May rather than waiting for July’s data will have more options available when the El Niño impact becomes measurable.
The monsoon always has a wide uncertainty band around any forecast issued in April. The 94 percent national average could improve if El Niño develops more slowly than projected, or worsen if it strengthens faster. What is certain is that the economic environment into which it arrives, with input costs at 45-month highs, crude oil at 52-week highs, the rupee at record lows, and the Iran war showing no sign of resolution before Trump’s Tuesday deadline expires tonight, is the most challenging backdrop for a below normal monsoon forecast that India has faced in the modern era of its economy.
Two economic pressures. One collision. And the RBI, the Finance Ministry, and India’s farmers are all sitting directly in its path.
This article draws on Skymet Weather’s southwest monsoon 2026 forecast released April 7, 2026, and the HSBC India Services PMI report for March 2026 released by S&P Global on April 6, 2026. All forecasts are probabilistic and subject to revision. This article is for informational purposes only and does not constitute financial, agricultural, or investment advice.