Introduction
Climate is increasingly becoming an important driver of the global economy and financial markets. Beyond agriculture, changing weather patterns now influence inflation, interest rates, energy demand, commodity prices and corporate earnings. In 2026, the focus has shifted towards the rapid development of a strong El Niño, with leading weather agencies indicating that it could strengthen into a Super El Niño.
According to the US National Oceanic and Atmospheric Administration (NOAA), there is an 89% probability that El Niño will strengthen this year and a 62% probability that it could develop into a Super El Niño. The World Meteorological Organization (WMO) also expects the event to intensify between July and September.
For India, this comes as the India Meteorological Department (IMD) has projected the 2026 southwest monsoon at 90% of the Long Period Average (LPA), with an 84% probability of below normal rainfall. While agriculture contributes a smaller share to GDP today, the monsoon remains a key driver of inflation, rural demand and monetary policy.
What is a Super El Niño?
El Niño is a natural climate phenomenon where sea surface temperatures in the central and eastern Pacific Ocean become warmer than usual, disrupting global rainfall patterns.
A Super El Niño is an exceptionally strong event that has historically resulted in severe droughts, heatwaves, lower agricultural output and higher food prices across many parts of the world.
Expected Global Impact
The biggest concern for financial markets is the return of commodity led inflation.
The 1997 to 1998 Super El Niño is estimated to have erased nearly US$5.7 trillion in global GDP over the following five years, highlighting that the economic impact extends well beyond the weather event itself.
Current estimates suggest:
- Global food commodity prices could rise by up to 9%.
- Non energy commodity prices have historically increased by around 5% for 6 to 16 months after an El Niño begins.
- Prices of rice, sugar, cocoa, coffee and palm oil could increase by 20% to 50% if adverse weather persists.
- Elevated food prices may keep global inflation high into 2027, delaying interest rate cuts by major central banks.
Higher temperatures are also expected to increase electricity demand while reducing renewable power generation, leading to greater dependence on conventional energy.
Expected Impact on India
The primary risk for India is expected to come through higher inflation rather than a significant slowdown in economic growth.
Economic Growth
According to SBI Research:
- Moderate drought conditions could reduce GDP growth by 20 basis points.
- A severe rainfall deficit could lower growth by up to 65 basis points.
Despite these risks, India’s GDP growth is still expected to remain between 6.5% and 6.8%, supported by domestic consumption, infrastructure spending and services.
Inflation
Food accounts for nearly 37% of India’s Consumer Price Index.
Current estimates indicate:
- FY27 CPI inflation could rise to 4.5% to 5.0%.
- Crop losses in rain dependent regions alone could add around 0.4 percentage points to food inflation.
Persistent food inflation could reduce the RBI’s flexibility to lower interest rates during FY27.
Agriculture and Power
Nearly 50% of India’s cultivated land still depends on rainfall. Previous El Niño years have recorded more than 10% declines in paddy production across several districts, along with lower yields for maize and sorghum. Reduced reservoir levels could also affect rabi crops such as wheat, mustard and chana, leading to weaker rural demand.
Beyond agriculture, India has already witnessed one of its hottest summers on record, with peak electricity demand reaching 270 GW. Between July 2026 and June 2027, the country may require an additional 17.7 TWh of fossil fuel based power due to higher cooling demand and weaker wind and hydropower generation. Under a severe scenario, the power shortfall could widen to 24 TWh.
Outlook
Current forecasts suggest El Niño is likely to remain active until early 2027, with the strongest phase expected between November 2026 and January 2027. Forecast models assign a 63% probability of the event reaching a very strong intensity before gradually weakening during spring 2027.
This suggests the impact may extend beyond the current monsoon season. Lower rainfall could affect both the kharif and rabi crop cycles, while the delayed atmospheric warming effect may result in an even hotter summer in 2027, keeping electricity demand elevated.
For markets, the biggest risks remain higher food inflation, delayed RBI rate cuts and softer rural demand, rather than a sharp slowdown in economic growth. While GDP growth could moderate by 20 to 65 basis points and CPI inflation may move towards 4.5% to 5.0%, India enters this period with stronger structural buffers than previous El Niño episodes, including healthy food grain stocks, better policy support and a more diversified economy.
Investors should closely monitor inflation, monsoon progress and RBI policy, as these indicators will determine whether the weather disruption remains manageable or evolves into a broader macroeconomic headwind through FY27 and early 2027.
Investors are advised to consult their financial advisors before making any investment decisions. This view does not constitute investment advice.
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