In order to target retail inflation in 2026, India is getting ready to change its CPI calculation methodology and monetary policy mandate following a year of benign price conditions brought on by lower food prices and a cut in the GST.
Retail inflation based on the Consumer Price Index (CPI) stayed within the Reserve Bank's comfort zone (2-6%) and is probably going to remain there for the upcoming year as well, leaving open the potential of at least one additional rate cut by the central bank in the months to come.
In addition to lowering food prices, the government's September decision to lower GST rates on roughly 400 commodities contributed to the nation's price situation getting better.
Through 2025, the wholesale pricing index (WPI) also demonstrated distinct indications of a reduction in inflationary pressures. WPI inflation was positive but dropping in the first few months, which was indicative of lessening price pressure, particularly in the food and gasoline categories.
WPI entered deflation by June, and July and October saw negative prints as the declining trend persisted. Headline inflation, or CPI, began to fall in November 2024 and stayed under the Reserve Bank's comfort zone (2-4%) until June 2025.
It has since fallen below 2%. Food inflation, which accounts for over 48% of the CPI, began to fall in January from roughly 6% and went into negative territory in June. The most recent data shows that it was at (−) 3.91 in November.
The discussion surrounding the government's mandate to the central bank to maintain inflation within the objective of 2-4% acquires significance as inflation surpasses the RBI's lower band target of 2%.
A consultation paper on the inflation targeting regime has already been released by the Reserve Bank. The present five-year regime is scheduled to expire in March, and the government will introduce a new framework on April 1, 2025.
In the meantime, the government is developing a new CPI series with a base year of 2024 (100), which will include a thorough revision of the coverage, item basket, weights, and index compilation process.
The goal of the activity, which is being carried out after more than ten years, is to significantly enhance the inflation data's representativeness, correctness, dependability, and general quality. In February, the new series will premiere.
According to RBI Governor Sanjay Malhotra, headline inflation is expected to be near the 4% objective in H1:2026-2027. As has been the case since the start of 2024, inflation is expected to be significantly lower when precious metals are excluded.
Additionally, the CPI for the entire year (2025-2026) is likely to be about 2%, which is half of what was predicted at the start of the year, due to strong agricultural production, low food prices, and an extraordinarily benign prognosis for international commodity prices.
Since February 2025, the Reserve Bank has lowered the short-term benchmark lending rate (repo) by 125 basis points while keeping inflation under control.
According to Bank of Baroda Chief Economist Madan Sabnavis, "the new index and its composition will be the most important aspect of inflation in 2026, which can drive any realistic forecasts as this should be in place in February 2026."
"We may anticipate that inflation will be well under control in 2026, assuming a typical monsoon. Overall, it can be anticipated to be between 4 and 4.5 percent, he added, although the exceptionally low inflation figures seen in 2025 will be reversed because the low base would result in higher numbers.
February may be the last month to make a rate call choice because there won't be any more room for rate reductions. As the effects of the GST completely materialize, core inflation should ideally reduce, Sabnavis continued.
According to ICRA Chief Economist Aditi Nayar, variations in the weighing pattern and coverage of these indexes are what cause the disparity between the WPI and the CPI.
According to her, services and non-food items have kept the CPI from slipping into the deflationary zone, even if the food segment has been in it across the wholesale and retail divisions.
"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 stated.
Dharmakirti Joshi, Chief Economist at Crisil, commented on the inflation situation in the new year, saying that both the CPI and WPI surprised everyone this year by showing lower-than-expected readings every month.
While CPI inflation was only 0.7% in November, WPI remained in deflationary territory. The CPI again showed deflation this month, excluding gold.
"Even though growth remained above trend, the RBI was able to lower rates due to exceptionally low inflation. In the future, we anticipate that base effects will cause consumer inflation to increase to 5% in FY27, while interest rates will probably stay at 5.25%.
But it's anticipated that the previously announced tariff reductions will continue to be transmitted," Joshi stated. The Reserve Bank will hold its final bi-monthly monetary policy meeting for 2025-2026 on February 4-6, 2026.
