An improved index: New CPI will not affect monetary policy in the near term

India's new CPI series modernises inflation measurement, reshapes RBI policy signals, and underscores the need for more market-friendly data release timings

The new consumer price index (CPI) series showed that the inflation rate increased to 2.75 per cent in January, up from 1.33 per cent in December (old series). The food-inflation rate was 2.13 per cent. The composition of the CPI has undergone a significant change, along with the shift in the base year to 2024 from 2012.  In a rapidly developing country like India, critical indicators must be regularly finetuned to reflect the prevailing situation. However, the revision this time was delayed owing to a variety of factors, including the pandemic. Besides the new CPI series, released on Thursday, the National Statistics Office (NSO) will also release a new series on gross domestic product (GDP) later this month. Together, these will present a more accurate picture of the Indian economy and better inform all stakeholders, including policymakers. 

The changes in the new series are based on the Household Consumption Expenditure Survey 2023-24 to reflect the most recent patterns of consumption among households in both urban and rural areas. Coverage in the new series has also been significantly increased and shows a more modern consumption basket. For instance, for the first time, prices are being captured from online markets in select locations. Coverage in the services sector has been increased to 50 items, as against 40 in the previous series. The number of weighted items at national level has been increased to 358, compared to 299 in the previous series. The new series also includes items such as online media and streaming services. In terms of components, the weighting of food and beverages has declined to 36.75 per cent, as against 42.62 per cent in the previous series (according to the new structure). The reduction in the food component is expected to make the index less volatile.  The food component is usually much more volatile than the core. 

Besides reflecting the inflationary conditions faced by households, the new CPI series will be particularly significant for the Reserve Bank of India (RBI) in conducting monetary policy. The RBI is mandated to target the CPI inflation rate at 4 per cent, with a tolerance band of 2 percentage points on either side. The Monetary Policy Committee (MPC) of the RBI refrained from giving the inflation projection for the whole of the next financial year in its last meeting because of the scheduled change in the base year. As things stand, while the full-year projection for 2026-27, based on the new series, will be closely watched, it is unlikely to make the MPC shift its position in the immediate short run. However, based on the new series, inflation projections may be increased for the coming quarters. In such a condition, the policy repo rate, at 5.25 per cent, could be the terminal rate for the current cycle. Thus, for now, financial markets will be more focused on government borrowing and liquidity, which are affecting market interest rates. 

Finally, now that the base year for the CPI has been changed after a long wait and a similar change is being made in the GDP series, the NSO must take this opportunity to change the time of data release. Releasing data at 4 pm makes little sense. Given that market-moving announcements such as monetary-policy decisions and the presentation of the Union Budget are made during market hours, which is the right thing to do, it is puzzling why the numbers on GDP and inflation rates are released after trading hours. In fact, releasing data in the morning will allow investors to adjust.