After S&P, ADB raises India's growth aim to 7% but El Nino clouds food story

India's economy continues to defy expectations, with the Asian Development Bank (ADB) raising its 2026 growth forecast to 7% amid resilient domestic factors. Consumers, investments and government spending help cushion the country from global volatility. However, the forecast carries a warning: an intensifying El Nino coupled with higher energy prices could spark another inflation shock for a nation where food costs significantly impact households.

A stronger El Nino and pricey energy could create a dual supply shock, hurting farm output, hydropower generation and pushing up food prices, especially in South Asia where food dominates consumer price indices. This weather risk is already evident, as India's monsoon is 15% below average, threatening Kharif crops like rice, sugarcane and corn.

If the harvest weakens, it could further strain household budgets and fuel inflation, with retail inflation already at 4.8% in August, its third consecutive month above the RBI's 4% target. The ADB expects India's 2026 retail inflation to average 5.2%, limiting the room for the Reserve Bank of India to absorb additional food and energy price surges.

The growth outlook aligns with other rating agencies. S&P Global Ratings and Moody's Ratings also increased their growth forecasts for India, projecting 7% for FY27, emphasizing strong domestic demand, industrial output, consumption, exports and government investment. Moody's sees the Reserve Bank of India raising its policy rate by 25 basis points this fiscal year due to persistent inflation, weather risks and geopolitical tensions.