India plans CPI revamp as inflation likely to remain low in 2026

India is preparing to revamp the methodology for computing the Consumer Price Index (CPI) and revise the monetary policy mandate for targeting retail inflation in 2026, following a year of benign price conditions driven by subdued food costs and a reduction in GST rates.

CPI-based retail inflation remained within the Reserve Bank of India’s comfort zone of 2–6 per cent and is expected to stay within this range in the coming year as well. This has kept open the possibility of at least one more rate cut by the central bank in the months ahead.

In addition to easing food prices, the government’s decision to reduce GST rates on around 400 items in September further improved the price situation.

Wholesale Price Index (WPI) data also showed a clear easing of inflationary pressures through 2025. While the early months of the year recorded positive but declining WPI inflation, reflecting softening price pressures particularly in food and fuel, the index entered deflation in June. The downward trend continued with negative readings in July and October.

Headline CPI inflation began declining in November 2024 and remained within the RBI’s comfort zone of 2–4 per cent until June 2025. Thereafter, it slipped below the 2 per cent mark.

Food inflation, which accounts for around 48 per cent of the CPI basket, started easing from about 6 per cent in January and entered negative territory in June. According to the latest data, food inflation stood at (-)3.91 per cent in November.

With inflation breaching the RBI’s lower tolerance band of 2 per cent, the debate around the government’s mandate to the central bank to maintain inflation within the 2–4 per cent target range has gained importance.

The RBI has already released a consultation paper on the inflation targeting framework. The government is expected to announce a new framework effective April 1, 2025, as the current five-year regime comes to an end in March.

Separately, the government is working on a new CPI series with a revised base year of 2024 = 100. The new series will involve a comprehensive revision of coverage, item basket, weights and methodology used in index compilation. This exercise, being undertaken after more than a decade, aims to significantly improve the representativeness, reliability, accuracy and overall quality of inflation data. The new CPI series is scheduled to be released in February.

On inflation expectations, RBI Governor Sanjay Malhotra said headline inflation is projected to be close to the 4 per cent target in the first half of 2026–27. Excluding precious metals, inflation is expected to be much lower, continuing the trend observed since the beginning of 2024.

He added that good agricultural output, low food prices and an exceptionally benign outlook for international commodity prices suggest that CPI inflation for the full year 2025–26 is likely to be around 2 per cent, which is half of what was projected at the beginning of the year.

With inflation remaining under control, the RBI has cumulatively reduced the short-term benchmark lending rate, or repo rate, by 125 basis points since February 2025.

“The most important aspect of inflation in 2026 will be the new index and its composition, which can drive any realistic forecasts as this should be in place in February 2026,” Bank of Baroda Chief Economist Madan Sabnavis said.

“Assuming a normal monsoon, we can expect inflation to be very much under control in 2026. While the extremely low inflation numbers witnessed in 2025 will get reversed as the low base will result in higher numbers, on the whole it can be expected to be in the range of 4–4.5 per cent,” he said.

He added that this would not leave room for further rate cuts, making February the final window for a rate decision. Core inflation is also expected to moderate as the impact of GST reductions fully plays out.

ICRA Chief Economist Aditi Nayar said the divergence between WPI and CPI inflation is due to differences in weighting patterns and index coverage.

While food prices have remained in deflation across both wholesale and retail segments, services and non-food goods have prevented CPI inflation from slipping into deflation, she said.

“However, the presence of crude oil, higher weight for fuels, and low inflation in the wholesale manufactured segment has enabled food to pull down the WPI into the deflationary zone,” Nayar said.

Commenting on the inflation outlook, Crisil Chief Economist Dharmakirti Joshi said both CPI and WPI delivered significant surprises during the year, with each month recording lower-than-expected readings.

In November, WPI remained in deflation, while CPI inflation stood at just 0.7 per cent. Excluding gold, CPI inflation also entered deflation during the month.

“Exceptionally low inflation provided the RBI with room to cut rates, even as growth remained above trend. Looking ahead, we expect consumer inflation to rise to 5 per cent in FY27, largely due to base effects, while interest rates are likely to remain steady at 5.25 per cent. However, the transmission of the already announced rate cuts is expected to continue,” Joshi said.

The RBI’s final bi-monthly monetary policy meeting for 2025–26 is scheduled to be held from February 4 to 6, 2026.