Retail inflation in January, under the reworked Consumer Price Index (CPI) series with a new 2024 base year, came in at 2.75% year-on-year—almost exactly in line with expectations. A Bloomberg survey had pegged the median estimate at 2.77%. Some economists calculate that, under the old series, January inflation would have been 25-30 basis points lower.
With several outdated items dropped and new, more representative goods and services added, the revised basket has pushed inflation marginally higher. There has been a sharp reduction in the weighting of food—down nearly nine percentage points from 45.86% to 36.75%. What matters is that inflation remains comfortably below the midpoint of the 2-6% target band. Projections of a pickup in FY27 under the old series were largely premised on higher food prices. With food carrying a smaller weighting, the FY27 inflation print could prove more modest.
If the trajectory implied by January’s data persists, the Reserve Bank of India (RBI) will have little reason to revisit its current monetary policy stance. Having projected CPI inflation at a little over 4% for the first half of FY27, the central bank has signalled a prolonged pause. With growth holding up, this could well mark the end of the rate-cutting cycle. Equally, a rate-hike cycle appears distant unless unforeseen shocks drive inflation sharply higher. Trade agreements with the US and the UK may, over time, lift growth and aggregate demand, but they are yet to be executed and their consumption impact will take time to materialise.
The new GDP series, too, will need to be factored in when assessing demand and price dynamics. A slightly higher inflation reading, even if modest, suggests the cost of capital is unlikely to ease meaningfully. Bond yields remained flat on Thursday largely because of abundant system liquidity and stable global yields.
Food inflation, at 2.13%, was somewhat higher than anticipated, reflecting sharper price increases in items such as coconut oil and tomatoes. While there has long been a debate over whether volatile food prices should be excluded from the headline index, food remains integral to household spending and the recent uptick warrants close monitoring. On the other hand, core inflation under the new series—based on economists’ estimates—appears subdued at below 4%.
The CPI overhaul, long overdue, should improve policymaking by aligning the basket more closely with current consumption patterns. Several of the central bank’s inflation forecasts last year overshot actual outcomes, arguably encouraging greater caution on rate cuts than warranted. Incorporating expenditures such as online shopping and streaming services should yield a more accurate picture of household budgets. Alongside a refreshed GDP series, the updated CPI will provide policymakers with more realistic data. Without reliable and relevant statistics, the task of crafting effective economic policy becomes considerably harder.
Overall, the exercise was worth it as a base-year revision keeps statistics aligned with changing consumption and production patterns. Over time, economies evolve, incomes rise, lifestyles shift, and spending priorities change. Without periodic updates, inflation numbers risk telling an outdated story. The overhaul also incorporates methodological improvements, richer data sources, and updated weightings to better capture present-day consumption trends. In essence, the numbers are being recalibrated to reflect modern India. As incomes rise, households typically spend a smaller proportion of their budgets on basic staples and more on services and discretionary consumption. The revised weighting reflects this transition.