India's Inflation Strategy: A New Approach for 2026

India is set to transform its approach to measuring inflation and monetary policy by 2026, following a year of stable prices driven by lower food costs and GST reductions. The Reserve Bank of India is expected to maintain inflation within its target range, with potential interest rate cuts on the horizon. A new CPI series is being developed to enhance the accuracy and reliability of inflation data. Experts predict that inflation will remain controlled, with projections suggesting a rise to around 4-4.5% in 2026. This article delves into the implications of these changes and what they mean for the Indian economy.

By Narendra Chaudhary Dec 30, 2025, 16:57 IST

Revamping Inflation Measurement in India

New Delhi: India is set to overhaul its methodology for calculating the Consumer Price Index (CPI) and update its monetary policy framework aimed at controlling retail inflation by 2026. This decision follows a year marked by stable prices, largely due to lower food costs and a reduction in Goods and Services Tax (GST).

The CPI-based retail inflation has consistently remained within the Reserve Bank of India's (RBI) target range of 2-6 percent and is expected to continue this trend into the next year, potentially allowing for further interest rate cuts by the central bank in the near future.

The government's move to lower GST rates on approximately 400 items in September has also contributed to the improved pricing landscape.

Moreover, the wholesale price index (WPI) has shown a clear decline in inflationary pressures throughout 2025, with initial months reflecting a positive yet decreasing WPI inflation, particularly in food and fuel sectors.

By June, the WPI entered a deflationary phase, continuing with negative figures in July and October.

CPI, or headline inflation, began its downward trend in November 2024, remaining within the RBI's comfort zone (2-4 percent) until June 2025, after which it dipped below 2 percent.

Food inflation, which makes up about 48 percent of the CPI, started to decrease from around 6 percent in January and fell into negative territory by June, reaching (-) 3.91 in November, according to recent statistics.

With inflation dropping below the RBI's lower target of 2 percent, discussions regarding the government's directive to the central bank to maintain inflation within the 2-4 percent range have gained importance.

The RBI has already released a consultation document regarding the inflation targeting framework, with a new structure expected to be implemented on April 1, 2025, as the current five-year term concludes in March.

In addition, the government is developing a new CPI series with a base year set to 2024, which will involve a thorough revision of the coverage, item basket, weights, and the methodology used for index compilation.

This update, the first in over a decade, aims to significantly enhance the representativeness, reliability, accuracy, and overall quality of inflation data, with the new series scheduled for release in February.

Regarding inflation expectations, RBI Governor Sanjay Malhotra indicated that headline inflation is anticipated to approach the 4 percent target in the first half of 2026-27. Excluding precious metals, inflation is expected to remain considerably lower, consistent with trends observed since early 2024.

Additionally, favorable agricultural yields, low food prices, and a positive outlook for international commodity prices suggest that the CPI for the fiscal year 2025-26 could hover around 2 percent, significantly lower than initial projections.

With inflation under control, the Reserve Bank has cumulatively reduced the short-term benchmark lending rate (repo) by 125 basis points since February 2025.

"The key factor influencing inflation in 2026 will be the new index and its composition, which will be crucial for making realistic forecasts, expected to be finalized by February 2026," stated Madan Sabnavis, Chief Economist at Bank of Baroda.

"Assuming normal monsoon conditions, we can anticipate inflation to remain well-managed in 2026. Although the exceptionally low inflation rates seen in 2025 may reverse due to a low base effect, overall inflation is likely to stabilize between 4-4.5 percent," he added.

This scenario may limit the potential for further rate cuts, making February a critical month for any rate decisions. Core inflation is expected to moderate as the GST effects fully materialize, Sabnavis noted.

Aditi Nayar, Chief Economist at ICRA, explained that the differences in the WPI and CPI are influenced by variations in their weighting patterns and coverage.

While the food sector has remained in deflation across both wholesale and retail indices, services and non-food items have prevented the CPI from entering deflation, she remarked.

"However, the impact of crude oil prices, the higher weight of fuels, and low inflation in the wholesale manufactured segment have allowed food prices to drive the WPI into deflation," Nayar added.

Looking ahead to the new year, Dharmakirti Joshi, Chief Economist at Crisil, noted that both CPI and WPI have surprised analysts this year, consistently reporting lower-than-expected figures.

In November, WPI remained in deflation, while CPI inflation was recorded at just 0.7 percent. Excluding gold, CPI also showed deflation during this month.

"The remarkably low inflation has provided the RBI with the flexibility to reduce rates, even as growth remains robust. We anticipate consumer inflation to rise to 5 percent in FY27, primarily due to base effects, while interest rates are expected to stabilize at 5.25 percent. However, the effects of previously announced rate cuts are likely to persist," Joshi stated.

The RBI's final bi-monthly monetary policy meeting for 2025-26 is scheduled for February 4-6, 2026.