In April MPC review, RBI projections to reflect new base year—What may change and what may not

RBI Governor Sanjay Malhotra said on Monday that the central bank's next projections will reflect its revised base year as well as its updated methodology of CPI and GDP data.

The revised framework, he said, will be taken into account in the RBI's projections scheduled to be released in April. Normally, the RBI governor-chaired Monetary Policy Committee conducts six bi-monthly reviews every financial year. His remarks come roughly a fortnight into the central bank releasing its first consumer inflation reading under the new series. Official quarterly GDP data is due at the end of the month.

Stating that a revision in the inflation targeting range is under examination, he said: "While the methodological changes are material in terms of coverage, representativeness and volatility, they are 'not substantial' enough by themselves to necessitate a change in the inflation target." He was responding to a question on whether the RBI would consider revising the targeting range on account of the base year revision.

Retail inflation -- gauged by the Consumer Price Index (CPI) -- was recorded at 2.75 per cent in January. With that, consumer inflation returned to the RBI's medium-term target range of 2-6 per cent for the first time since August.

He also mentioned that the RBI had previously published a discussion paper and submitted its recommendations to the government, and a decision will be announced by the relevant authorities in due time.

New inflation data to capture household data more clearly

The changes are aimed at reflecting household spending patterns better. | Image credit: Getty Images

Noting that the changes will reflect household consumption expenditure patterns more clearly, he said that the change in methodology will result in better CPI inflation estimation.

The revision in the base year is part of the government's broader vision of updating key economic indicators -- including consumer inflation, GDP and IIP every 3-5 years in order to capture structural economic changes more clearly.

The revision in the inflation base year comes after a gap of more than a decade. The new series has 358 weighted items from the earlier 299, with higher coverage of services and modern consumption, and features rural house rent for the first time.

What changes and what doesn't

The new CPI series shifts the base year with expanded coverage (358 items vs prior 299), lower food weightage (39.7 per cent overall from 43 per cent) and new elements like rural house rent and e-commerce for improved representativeness.

Reduced weightage of food items, new categories introduced

The new series reduces the share of food-related items to 39.7 per cent from about 43 per cent and to 47 per cent from 53 per cent in urban and rural regions, respectively.

It seeks to capture data on e-commerce and digital platforms.

However, the inflation target band of 2-6 per cent remains unchanged, as methodological tweaks are not substantial enough to warrant revision. Another thing that will stay unaffected is historical inflation data.

Here are answers to a few frequently asked questions (FAQs) on the subject:

Why has the base year been revised?

The revision in the base year is aimed at capturing changing consumption patterns in the world's most populous country.

What is different in the new series?

The new series is based on revised weighting for key inflation components -- including food and housing -- under base year 2024. For instance, the weightage of food -- one of the most volatile components of the index -- has been kept at 37 per cent, versus around 46 per cent earlier.

Will the new base year influence historical data?

No.

Will the RBI change its inflation target because of the new CPI series?

The governor has clarified that while the methodological changes are material, they are not substantial enough by themselves to warrant a change in the target inflation band.

Could the new CPI series show lower volatility in inflation?

Yes, potentially.

Is the revision set to impact monetary policy decisions immediately?

Policy decisions continue to depend on the latest inflation and growth data.

How should investors interpret the new CPI framework?

Investors should focus on trends rather than one-off changes due to methodology. Over time, improved measurement may lead to higher policy predictability while mitigating data distortions.

Why does the government revise base years every few years?

Frequent rebasing ensures macroeconomic data reflects current consumption patterns, technological adoption and any structural shifts.