New Inflation Formula Changes the Narrative as India’s CPI Reset Alters Rate Expectations
India’s inflation conversation is quietly but meaningfully shifting after the introduction of a new Consumer Price Index (CPI) series with base year 2024. While this may appear to be a routine statistical update, economists say the methodological change is already influencing how inflation is perceived, forecast, and priced into financial markets. Because inflation expectations directly shape interest rate outlooks, bond yields, and equity valuations, even technical changes in CPI calculation can ripple through investor portfolios.
The most significant shift in the new series is the higher weight assigned to core inflation, which excludes volatile food and fuel components. Since core inflation tends to be more stable and is currently running lower than food inflation, the revised weight structure mechanically lowers projected headline inflation. As a result, several economists are trimming their FY27 CPI forecasts by 35–50 basis points. For markets that closely track inflation for policy signals, this is not a minor tweak but a meaningful recalibration of the macro outlook.
Higher Core Inflation Weight Is Reshaping CPI Projections and Market Assumptions
Under the new CPI framework, core inflation now carries a weight of 58%, up from 47% in the old series. Meanwhile, the weight of food and beverages has been reduced to 36.75% from 45.86%. This rebalancing reflects changing consumption patterns as Indian households spend relatively more on services and less proportionally on basic food items compared to a decade ago.
Other structural updates add depth to the index:
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Total items tracked increased to 358 from 299
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Goods coverage expanded to 308 items
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Services coverage increased to 50 items
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Consumption basket updated to reflect modern spending
The government has said the revision ensures the CPI remains representative of current household behavior and economic realities. For investors, this also means inflation data may now better capture services-led price trends in a growing economy. Importantly, when measurement aligns more closely with reality, policy responses may also become more predictable.
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Core Inflation Cools Sharply, Supporting a Softer Headline Trajectory
January 2026 data under the new series showed headline inflation at 2.75% and core inflation at 3.4%. Under the old framework, forecasts would have implied much higher core readings. The contrast becomes sharper considering that core inflation had hit a 28-month high of 4.6% in December on the old series.
Abhishek Upadhyay of ICICI Securities Primary Dealership said:
“We feel CPI inflation could be 4 percent in FY27 now, about 50 basis points lower than the previous estimate based on old series.”
He emphasized that inflation across services and several core components was below 2% in January, signaling contained underlying pressures. For markets, softer core inflation often signals that demand-driven price risks are limited, reducing the urgency for monetary tightening.
Economists Trim FY27 Forecasts, Though Some Prefer to Wait
Forecast revisions are emerging but not unanimous. ICICI Bank and IDFC FIRST Bank have lowered their FY27 CPI projections, with estimates now clustering around 4–4.1%. However, economists at ANZ Bank, Motilal Oswal Financial Services, QuantEco Research, and HDFC Bank are holding their numbers steady until the Reserve Bank of India formally adopts the new core definition for policy analysis.
This divergence shows that while statistical changes are clear, policy interpretation may take time. Investors should note that markets often move ahead of official adoption, especially if data consistently supports a softer inflation path.
Food Inflation Risks Could Still Complicate the Picture
Food inflation rose to 2.11% in January from negative readings earlier, driven by fruits, dairy, eggs, meat, and edible oils. Because fruits and beverages now have higher weights, monthly food momentum could run slightly stronger than in the old series.
Gaura Sen Gupta of IDFC FIRST Bank said:
“Food monthly momentum in the new-base year series will be higher going forward by 20–30 basis points.”
Rahul Bajoria of Bank of America expects food inflation to normalize near 5% in FY27, close to historical averages. Since food remains the most volatile CPI component, it continues to be the biggest swing factor in India’s inflation story.
RBI Rate Outlook Turns More Benign as Inflation Appears Contained
A lower projected inflation path reduces pressure on the RBI to raise rates. The repo rate stands at 5.25% after a 25-basis-point cut in December, and the February policy maintained status quo. The RBI has projected FY27 H1 CPI at 4.1%, but if the new series continues to print softer numbers, markets may increasingly price in an extended pause.
Upadhyay noted there is “no visibility of a hike” and that a rate cut cannot be ruled out if growth slows. Bajoria added the RBI is likely to hold rates for an extended period amid benign inflation and improving growth. Paras Jasrai of India Ratings and Research echoed expectations of policy stability.
Here’s What Happened Today and Why Traders Reacted
Markets reacted to the CPI shift because it changes assumptions around:
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Future rate hikes
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Bond yield direction
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Liquidity expectations
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Valuation comfort levels
Lower inflation forecasts typically support both equities and bonds, as they imply lower discount rates and stable borrowing costs. Traders quickly factor such macro signals into pricing.
What This Means for Investors and Portfolios
For investors, the implications are multi-layered.
Equity investors may see support for rate-sensitive sectors like banks, NBFCs, autos, and real estate, where stable rates help earnings visibility and valuations.
Bond investors benefit from a softer inflation outlook as it supports bond prices and limits yield spikes.
Portfolio strategy takeaways:
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Favor duration in debt allocations
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Stay diversified across rate-sensitive equities
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Monitor food inflation trends closely
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Watch RBI commentary for policy signals
A Technical Revision With Real Financial Consequences
The CPI revision may look statistical, but it influences how inflation risk is perceived, how policy is set, and how assets are priced. If core inflation remains soft and food prices stay manageable, India could enter FY27 with a more stable inflation backdrop than previously assumed.
For investors, fewer inflation shocks mean fewer policy surprises — and that stability is often the foundation for healthier market performance.
