India is preparing to rejig the methodology for computing the Consumer Price Index (CPI) and revamp monetary policy mandate for targeting retail inflation in 2026 after a year of benign price situation due to subdued food cost and GST reduction.
Consumer Price Index (CPI)-based retail inflation remained in the Reserve Bank's comfort zone (2-6 per cent) and is likely to stay that way in the next year also, keeping open the possibility of at least one more reduction in rates by the central bank in the coming months.
Besides cooling food prices, the decision of the government to reduce GST rates on about 400 items in September helped in further improving the price situation in the country. The wholesale price index (WPI), too, showed clear signs of easing of inflationary pressures through 2025. Early months recorded positive but declining WPI inflation, reflecting softening price pressures, especially in food and fuel categories.
By June, WPI entered deflation and the downward trend continued with negative prints in July and October. CPI, or headline inflation, started declining in November 2024, and since then it has remained in the Reserve Bank's comfort zone (2-4 per cent) till June 2025. Thereafter, it has slipped below 2 per cent.
Food inflation, which constitutes about 48 per cent of the CPI, started declining from about 6 per cent in January and entered the negative territory in June. It was at (-) 3.91 in November, according to the latest data. With inflation breaching the RBI's lower band target of 2 per cent, the debate around the government's mandate to the central bank to keep inflation within the target of 2-4 per cent assumes significance.
The Reserve Bank has already issued a consultation paper with regard to the inflation targeting regime. The government will come out with a new framework effective April 1, 2025, with the current five-year regime set to end in March. Meanwhile, the government is working on a new CPI series with base year (2024 = 100), which will witness a comprehensive revision of coverage, item basket, weights and methodology used in index compilation.
The exercise being done after more than a decade is aimed at substantially improving the representativeness, reliability, accuracy and overall quality of the inflation data. The new series will be released in February.
On inflationary expectations, RBI Governor Sanjay Malhotra opined that the headline inflation is projected to be close to the 4 per cent target in H1 of 2026-27. Excluding precious metals, inflation is likely to be much lower, as has been the trend since the beginning of 2024.
Further, good agricultural production, low food prices and exceptionally benign international commodity price outlook suggest that the CPI for the full year (2025-26) is likely to be around 2 per cent, half of what was projected at the beginning of the year. With inflation remaining in control, the Reserve Bank has cumulatively reduced the short-term benchmark lending rate (repo) by 125 basis since February 2025.
Also read: WPI inflation stays negative at -0.32 pc in November
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