The US–Iran conflict has already disrupted India’s pre-war macro stability; as energy shocks are being absorbed, growth–inflation dynamics now face a likely El Niño. NOAA (April 2026) assigns a 61–70 per cent chance of El Niño emerging in June–August 2026 and persisting through year-end.
IMD flags a 31 per cent probability of “below normal” monsoon and a 35 per cent chance of rainfall below 90 per cent of LPA—risks for agriculture, heatwaves, and demand. However, El Niño’s transmission to agricultural GVA, rural incomes and aggregate demand has weakened recently due to greater irrigation, crop and income diversification, MSP support, cash transfers, and rising non-farm rural earnings.
Impact on rural demand due to El Nino isn’t linear: Due to diversification of rural income, demand prospects even during strong El Nino and sharp underperformance of monsoon aren’t always bad. For instance, two-wheeler sales — the recognized rural demand proxy — grew in every El Nino episode. Incidentally, even during episodes of very strong El Nino 2015-16 and strong 2023-24 2-wheeler sales grew 3 per cent and 13.3 per cent respectively.
The silent tailwind of gold wealth effect: Higher gold prices reinforce household balance sheets via a perceived financial security, especially rural/semi-urban households, and provide a stabilising effect in terms of income or price shock. Rising gold prices are also increasing collateral value for gold loans. As on Dec-25, 68 per cent of the gold loan originations were in rural and semi-urban areas with agriculture dominated states such as Uttar Pradesh, Madhya Pradesh, and Rajasthan recording a growth of 96 per cent, 80 per cent and 79 per cent respectively in Dec-25 on YoY basis. TransUnion CIBIL data shows that as the asset value (gold prices) is rising, average ticket size of gold loans is rising too – 1.8x (Dec-25 vs Dec-23) suggesting consumers are leveraging their high-value loans to meet their financing needs.
Bumper Rabi crop and two consecutive monsoons can help blunt the impact of El Nino: The Rabi crop output is estimated to be 3.2 per cent higher than last year and our checks suggest that on ground realisation across all Rabi crops have been better than Kharif 2025. Although severe El Nino risks are worrying, India has seen two consecutive years of above normal rainfall and thus the impact of an El Nino on income and demand may not be as pronounced. Further, as per the ENSO strength data, probabilities for Strong and Very Strong El Niño events are peaking during OND (October-November-December) and NDJ (November-December-January) periods, which suggests that the damage to the summer crop may not be as anticipated.
The author is Deputy Head of Research & Economist, Elara Capital. Views are her own.
