India’s inflation revamp may give Reserve Bank a reason to stay on hold

Core Insights - The overhaul of the Consumer Price Index (CPI) reflects significant changes in spending patterns, with the weighting of volatile items like food reduced to approximately 36.8% from nearly 50% and new categories such as rural housing rentals and online shopping added [1][9] - The base year for the CPI has been updated from 2012 to 2024, which is expected to provide a more accurate representation of current economic conditions [1][9] - The median estimate from economists suggests that the January inflation reading could rise to about 2.77%, compared to 1.33% in December based on the previous CPI series [2][10] Monetary Policy Implications - The revised CPI is anticipated to enhance the effectiveness of the Reserve Bank of India's (RBI) monetary policy actions, potentially minimizing past policy errors associated with the older series [8][10] - The weight of core inflation, which excludes food and fuel, will increase to nearly 58% from 47.3%, making it more responsive to monetary policy [10] - Financial market participants are closely monitoring these changes, as a higher inflation trajectory may lead to elevated borrowing costs, influencing bond yields and equity valuations [8][10] Economic Context - The new CPI series is expected to better reflect India's economic reality, particularly as consumer spending has rapidly expanded, with rising incomes leading to decreased spending on food and increased spending on services and housing [9][10] - The government plans to publish GDP data based on the new consumer spending patterns, which may indicate a significant upward revision in the size of the economy, potentially positioning India to surpass Japan as the world's fourth-largest economy [11][12] - The CPI overhaul will replace outdated items in the index with more relevant categories, including airfares and e-commerce sales, while excluding free food items from government welfare programs [12][13]