Inflation in New CPI Series Likely To Be Higher, RBI To Hold Rates

Mumbai: The new Consumer Price Inflation (CPI) series is unlikely to meaningfully influence monetary policy outlook in the near term. Economists expect the RBI to continue to hold rates as retail inflation is likely to rise under the new series while growth outlook looks robust from the successful India-US trade deal, positive fiscal impulse in the recent union budget and focus on structural reforms. Economists keenly await the release of the new GDP series (on February 27) to evaluate the growth- inflation dynamics.

Radhika Rao, senior economist, DBS said, "We don’t expect the new inflation series to meaningfully influence policy decisions in the near term, with an extended rate pause likely, supported by a positive cyclical upswing and confidence effects stemming from the successful conclusion of US-India trade negotiations.

According to Yes Bank economists, "While the inflation was expected to rise with the new series, the extent of rise remains difficult to gauge with just one print. Consequently, as we wait for next CPI readings, we do not expect this reading to immediately materialize in RBI action. We believe that we are at the terminal rate with real rate gap of 1.25 per cent with RBI’s own forecast at 4 per cent for H1FY27."

Headline CPI inflation rose to 2.75 per cent year on year in January 2026 (as per the new series with 2024 base year), a marginal upside bias of 20 basis points, compared with 2.55 per cent year on year in the old series. This includes rural inflation of 2.73 per cent year on year and urban CPI inflation of 2.77 per cent year on year in January. A notable adjustment in the new series is the substantial reduction in the weight of food to 36.8 per cent (from 42.6 per cent as per the 2012 series), lowering the impact of volatile components that have historically caused large fluctuations in headline inflation. Total number of weighted items in 2024 series are 358 (earlier: 299). Among these items, goods increased from 259 to 314 and services from 40 to 50 items. While the items like rural housing, online media service provider/streaming services, value added dairy products, Barley & its product, pendrive and external hard disk, attendant, babysitter and exercise equipment are new additions, some items like VCR/VCD/DVD player and hiring charges, radio, tape recorder, clothing second-hand, CD/DVD audio/video cassettes and Coir/rope are removed as the same have become obsolete.

Further, 12 online markets are also added across 12 towns having more than 25 lakh population as per 2011 census

Tanvee Gupta Jain, chief India Strategist, UBS India in a report said, "We don’t expect the new inflation series to meaningfully influence policy outlook in the near term. The RBI has already lowered policy rate by 125 basis points in this cycle, bringing the repo rate to 5.25 per cent. In our view, the repo rate is nearing its terminal range of 5-5.25 per cent. In our base case, we continue to expect RBI to go for an extended pause..."

The RBI has been quite active in managing liquidity since December policy via Rs 4.5 lakh crore of OMOs, US $25 billion of long-term forex buy/sell swap auction, 90-day VRR operation (Rs 250 billion in Jan and Rs 1.1 lakh crore in Feb).

"Going into FY27, we expect RBI to continue to provide durable liquidity support of Rs3-4 lakh crore via OMOs. We expect capital flows to pick-up momentum next year and should reduce the need for FX buy-sell swaps. That said, we will await the release of the new GDP series (on 27 February) to evaluate the growth- inflation dynamics, as well as the RBI's policy response, going forward," added Gupta.