India is preparing to overhaul its inflation measurement framework as the country experiences one of its most benign price environments in recent years. The government plans to introduce a new Consumer Price Index methodology and revamp the monetary policy mandate for targeting retail inflation in 2026, following a sustained period of controlled price pressures.

Inflation Remains in RBI's Comfort Zone

CPI-based retail inflation has consistently remained within the Reserve Bank's comfort zone of 2-6% and is projected to maintain this trajectory in the coming year. This stability has created room for potential monetary policy easing, with at least one more rate reduction possible in the coming months.

The inflation scenario has been particularly favorable due to two key factors:

• Cooling food prices across multiple categories
• Government's decision to reduce GST rates on approximately 400 items in September

Contrasting Performance of Price Indices

The wholesale and retail price indices have shown markedly different trajectories throughout 2025:

Food Inflation Turns Negative

Food inflation, which constitutes approximately 48% of the CPI basket, has experienced a dramatic transformation. Starting from around 6% in January, food prices entered negative territory by June and reached -3.91% in November according to the latest available data.

This deflationary trend in food prices has been a primary driver of overall price stability, contributing significantly to the benign inflation environment.

New CPI Framework and Methodology

The government is developing a comprehensive new CPI series with significant structural changes:

This exercise, being undertaken after more than a decade, aims to substantially enhance the quality of inflation data. The current five-year inflation targeting regime is set to conclude in March, with the new framework becoming effective from April 1, 2025.

Economic Projections and Policy Implications

RBI Governor Sanjay Malhotra has projected headline inflation to be close to the 4% target in H1:2026-27. However, excluding precious metals, inflation is expected to remain much lower, continuing the trend observed since early 2024.

Several factors support the outlook for continued low inflation:

• Good agricultural production prospects
• Sustained low food prices
• Exceptionally benign international commodity price outlook

These conditions suggest that CPI for the full year 2025-26 is likely to be around 2%, representing half of what was initially projected.

Monetary Policy Response

With inflation remaining controlled, the Reserve Bank has implemented accommodative monetary policy measures. The central bank has cumulatively reduced the short-term benchmark lending rate (repo) by 125 basis points since February 2025.

Expert Analysis and Future Outlook

Bank of Baroda Chief Economist Madan Sabnavis emphasized that "the most important aspect of inflation in 2026 will be the new index and its composition." Assuming normal monsoon conditions, he expects inflation to remain well-controlled in 2026, though the extremely low numbers from 2025 may reverse due to base effects, with inflation potentially ranging between 4-4.5%.

ICRA Chief Economist Aditi Nayar explained the divergence between WPI and CPI, noting that while food segments remain deflationary across both wholesale and retail segments, services and non-food goods have prevented CPI from entering deflationary territory.

Crisil Chief Economist Dharmakirti Joshi highlighted that both indices delivered significant surprises throughout the year, with each month recording lower-than-expected readings. Looking ahead, he expects consumer inflation to rise to 5% in FY27, largely due to base effects, while interest rates are likely to remain steady at 5.25%.

The Reserve Bank's final bi-monthly monetary policy for 2025-26 is scheduled for February 4-6, 2026, which will provide crucial guidance on the future policy direction.

Indian government bonds exhibited limited movement in early trading on Tuesday, as market participants braced for a substantial state debt issuance and waning risk sentiment approaching the quarter-end. The cautious trading environment reflects concerns over supply pressures and liquidity constraints in the domestic bond market.

Bond Market Performance

The benchmark 10-year government bond yield demonstrated minimal volatility during morning trade, with key metrics showing:

Bond yields typically rise when prices decline, indicating modest selling pressure in the government securities market.

State Debt Supply Concerns

The primary factor weighing on bond sentiment is the scheduled state debt issuance, which presents significant supply pressure:

This substantial debt supply represents the largest state bond issuance in over three months, creating concerns about market absorption capacity.

Liquidity Deficit Impact

The banking system continues to face liquidity challenges that are amplifying bond market pressures:

• Banking system in cash deficit since December 16
• Current liquidity shortfall stands at ₹71,580 crores as of Monday
• Widening liquidity squeeze adding to market stress
• Deficit conditions persisting for extended period

RBI Intervention Measures

Despite market challenges, the Reserve Bank of India has implemented substantial support measures:

A private bank trader noted that while RBI's open market purchases have provided market support, the state debt supply glut continues to dampen risk appetite.

Fourth-Quarter Outlook

Market participants are anticipating a heavy debt calendar for the upcoming fourth quarter, with analysts projecting:

• Total debt supply of approximately ₹8.1 lakh crores for January-March period
• Central government contribution of about ₹3.1 lakh crores
• State government issuances of ₹5 lakh crores
• Quarterly supply reaching record high levels
• Supply volume roughly 25% above current quarter

Interest Rate Environment

India's overnight index swap rates remained stable in early trading as year-end approaches:

Trading interest has diminished near the calendar year-end, contributing to the unchanged rate environment across various tenors.