India is gearing up for a significant overhaul of its consumer price index (CPI) computation methodology and a revamp of the monetary policy framework for targeting retail inflation, set to take effect in 2026. This move comes after a year of remarkably benign inflation, driven by subdued food costs and reductions in Goods and Services Tax (GST).
A Year of Subdued Inflation Paves the Way for Change
Retail inflation, based on the Consumer Price Index, has comfortably stayed within the Reserve Bank of India's (RBI) tolerance band of 2-6% and is projected to remain so in the near term. This favorable price situation has kept the door open for at least one more potential policy rate cut by the central bank in the coming months. The cooling trend has been significantly aided by two key factors: a sustained decline in food prices and the government's decision in September to slash GST rates on approximately 400 items.
The Wholesale Price Index (WPI) also mirrored this disinflationary trend throughout 2025. The early months showed positive but steadily declining WPI inflation, indicating softening pressures, particularly in food and fuel. By June, the WPI entered a deflationary phase, with this downward trajectory continuing, resulting in negative prints in July and October.
The CPI, or headline inflation, began its descent in November 2024 and remained within the RBI's comfort zone of 2-4% until June 2025. Subsequently, it has dipped below the 2% mark. Food inflation, which carries a substantial weight of nearly 48% in the CPI basket, started declining from around 6% in January and turned negative in June. As per the latest data, it stood at -3.91% in November 2025.
New Inflation Framework and CPI Series on the Anvil
With inflation breaching the RBI's lower band target of 2%, the debate around the central bank's mandate to maintain inflation within the 2-4% target band has gained prominence. The current five-year inflation targeting regime is scheduled to conclude in March 2025. In response, the RBI has already issued a consultation paper regarding the future framework. The government is expected to announce a new mandate effective from April 1, 2025.
Concurrently, the government is working on launching a new CPI series with a revised base year of 2024=100. This exercise, the first comprehensive revision in over a decade, will involve a complete overhaul of the index's coverage, item basket, weights, and compilation methodology. The objective is to substantially enhance the representativeness, reliability, and accuracy of India's inflation data. The new series is slated for release in February 2026.
"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," remarked Madan Sabnavis, Chief Economist at Bank of Baroda.
Economists Weigh In on the Road Ahead
RBI Governor Sanjay Malhotra projected that headline inflation is expected to be close to the 4% target in the first half of the 2026-27 financial year. Excluding precious metals, inflation is likely to be much lower. Factors such as robust agricultural production, low food prices, and a benign international commodity price outlook suggest that the average CPI for the full year 2025-26 could be around 2%, half of the initial projections.
Capitalizing on the controlled inflation environment, the RBI has cumulatively reduced the key repo rate by 125 basis points since February 2025. Aditi Nayar, Chief Economist at ICRA, pointed out that the divergence between WPI and CPI movements is due to differences in their weighting patterns and coverage. While food is in deflation across both indices, services and non-food goods have prevented the CPI from falling into deflationary territory.
Dharmakirti Joshi, Chief Economist at CRISIL, noted that both CPI and WPI delivered significant surprises in 2025, with consistently lower-than-expected readings. "Exceptionally low inflation provided the RBI with room to cut rates, even as growth remained above trend," Joshi said. Looking forward, CRISIL expects consumer inflation to rise to 5% in FY27, largely due to base effects, while interest rates are likely to remain steady.
With the new CPI series and inflation targeting framework set to redefine the landscape, all eyes are now on the RBI's final bi-monthly monetary policy meeting for 2025-26, scheduled for February 4-6, 2026.
