New CPI Inflation Series in India Aims to Better Reflect Consumption Patterns and Reduce Volatility

Governor Sanjay Malhotra of the Reserve Bank of India (RBI) announced that the new Consumer Price Index (CPI) inflation series, based on 2024 prices, will more accurately reflect the consumption patterns of Indian households. This update aims to reduce volatility and improve CPI estimation. Malhotra shared these insights during a media briefing following the RBI Central Board of Directors' post-Budget meeting with Finance Minister Nirmala Sitharaman.

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The Ministry of Statistics and Programme Implementation has introduced a new CPI series that expands its coverage to 358 items, up from 299 in the previous series. This change is expected to provide a more comprehensive view of price movements. In January, retail inflation was recorded at 2.75% using this new series, which uses 2024 as the base year. This figure exceeded the lower end of the RBI's tolerance band for the first time since June 2025.

Inflation Targeting and Methodology Changes

The RBI's flexible inflation targeting regime is currently under review, coinciding with changes in CPI computation methodology. The government sets the CPI inflation target every five years in consultation with the RBI. Currently, the target is 4%, with a tolerance band of 2% to 6%, effective from April 1, 2021, to March 31, 2026. Malhotra noted that while the methodology changes, it might not necessarily alter the target.

Malhotra stated that any updates in CPI projection would be considered in the April policy estimate. "If the whole methodology is changing, then obviously the target will undergo a change," he remarked. The central bank has already submitted its recommendations to the government after consulting stakeholders, and these are under examination.

Monetary Policy Framework and Future Projections

India adopted an inflation targeting framework in 2016 following a Monetary Policy Framework Agreement with the government in 2015. The RBI governor-led six-member Monetary Policy Committee (MPC) decides on policy rates to achieve this target. As part of preparations for reviewing targets effective from April 1, 2026, amid global and domestic economic changes, the RBI is reassessing its approach.

The RBI released a discussion paper on August 21 seeking opinions on whether a 4% inflation target balances growth and stability in India. While acknowledging that flexible inflation targeting has been successful, they are also considering if core inflation should guide monetary policy decisions.

US Securities and Gold Holdings

When asked about changes in US securities reserves, Malhotra clarified there was no deliberate decision to reduce holdings. "There is no conscious call to reduce our holdings in US securities," he said. He attributed observed changes to valuation shifts due to increased gold holdings and a weakened US dollar.

The government is expected to announce its decision on the CPI target soon. "The government will very quickly be coming out with the target," Malhotra mentioned. Despite changes in CPI series methodology, he suggested that this might not lead to an immediate change in targets.

With inputs from PTI