Higher weight of core inflation in the new inflation series prompt economists to lower headline CPI forecast for FY27

Core inflation dropped sharply in January from a 28-month high of 4.6% in December.

• Core inflation weight rises in new CPI, lowering FY27 forecasts
• Economists now see FY27 CPI inflation 35-50 bps lower than before
• RBI likely to keep policy rates unchanged amid stable inflation

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A higher weight of core inflation in the new CPI series has prompted some economists to revise their CPI inflation forecasts for FY27 to the downside by 35-50 basis points– as they expect underlying price pressures to remain contained going forward.

"We feel CPI inflation could be 4 percent in FY27 now, about 50 basis points lower than the previous estimate based on old series," Abhishek Upadhyay, Senior Economist, ICICI Securities Primary Dealership told Moneycontrol.

"Core inflation has a bigger weight in new series. Across services and other categories of core basket – inflation is lower than 2 percent in January 2026. This is why headline print would be lower (in FY27)," Upadhyay explained.

Core inflation – which doesn’t include volatile component of CPI such as food and fuel – has a weight of 58 percent in the new CPI series (with base year 2024), up from 47 percent in the old series (with a base year of 2012). Food and beverages weight, meanwhile, has been reduced to 36.75 percent in the new series from 45.86 percent in the old one.

Also, in the new series, the number of items for which prices are tracked have risen to 358 from 299 earlier. Within this, goods items have increased from 259 to 308, and services items have increased from 40 to 50.

In a press release, issued on February 12, the statistics ministry said that the CPI series with base year 2024 has been introduced to ensure that the index remains representative of current household consumption patterns, price structures, and the evolving nature of the Indian economy.

The January 2026 data, released on Thursday, showed headline inflation at 2.75 percent, and core inflation at 3.4 percent, as against a forecast of 2.6 percent, and 5.1 percent, respectively, based on old series.

Notably, core inflation dropped sharply in January from a 28-month high of 4.6 percent in December (old series). To be sure, this figure is not strictly comparable, given the changes in weights and composition of the new CPI basket.

"What is clearly evident in the new series is that core inflation prints are likely to be far lower than the trajectory visible in the old series which is explained by expansion in markets, reclassification of weights and methodological changes," ICICI Bank’s Chief Economist Sameer Narang said.

Narang has estimated headline CPI print for FY27 to be 35 basis points lower than its previous forecast of 4.1 percent.

Gaura Sen Gupta, Chief Economist of IDFC FIRST Bank said that in FY27 headline inflation on new base year series will be lower by 40 basis points compared to old base year series. "Incorporating this, FY27 inflation on new base year series is estimated at 4.1% as against 4.5% on old series."

However, while some economists have revised their inflation forecast downwards, others have refrained from changing their forecasts – as they want to wait for the Reserve Bank of India to adopt the new definition of core inflation based on the new CPI series.

Economists from ANZ Bank, Motilal Oswal Financial Services, QuantEco Research, HDFC Bank have kept their forecasts unchanged at 4.2 percent, 4.5 percent, 3.9 percent, and 4.3 percent, respectively, for FY27.

Food inflation to rise

Food and beverages inflation stood at 2.11 percent in January 2026, way higher than (-)1.85 percent in December 2025.

The higher-than-expected food inflation was driven by fruits, dairy products, eggs, meat and edible oils during January.

Economists say that the food items that have seen a strong decline in prices in January -- such as vegetables, pulses and cereals -- their weights in the new base year CPI are lower; whereas, weights of fruits and non-alcoholic beverages are higher.

"This reflects changing consumption patterns as per-capita income rises. As a result, food monthly momentum in the new-base year series will be higher than old-base year series going forward by 20-30 basis points in FY27," Sen Gupta said.

Bank of America’s India & ASEAN Economist Rahul Bajoria said that the sharp decline in inflationary pressures in 2025 had been largely driven by a sharp fall in food inflation; but in the new index, while the level of food price decline appears to have prima facie corrected, the extent of underperformance has not.

"As such, our underlying logic of food prices mean reverting in 2026 due to their cyclical nature remains intact. As we await more information, we see food inflation normalizing back to around 5% in FY27 (close to decadal average of 5.1%), with risks balanced evenly," Bajoria noted.

Monetary Policy Implication

A possibility of inflation above 4 percent in FY27 was the key factor behind an expectation of a rate hike in the next financial year. However, due to the new series, inflation is seen to be lower than earlier-projected, giving room for the central bank to extend the pause on policy rate further, say economists.

The January’s inflation print, while a tad higher, does not signal any undetected inflationary pressures in India, they say.

We believe with the GDP growth uncertainty dissipating with the improvement in US India trade relations, the RBI had clearly signalled that they will most likely hold rates for an extended period, amid recovering growth and relatively benign inflation, even with a slightly higher threshold on inflation, said Bajoria.

I-SEC PD Upadhyay says there is "no visibility of a hike" in policy repo rate now, as underlying price pressures are contained. "If at all, growth momentum seems to weaken further, there could be a rate cut and not a hike."

The policy repo rate currently stands at 5.25 percent. In December, the rate was reduced by 25 basis points from 5.5 percent, and was kept unchanged in the February policy meet.

The RBI has projected CPI inflation in H1 of FY27 at 4.1 percent, which is sharply higher than 2.1 percent projected for FY26.

"Given the stable and controlled inflation so far along with a positive growth outlook owing to the various trade deals that have been signed in the recent timeframe, we expect the MPC to maintain a status quo in the policy rates in the near term," said Paras Jasrai, Associate Director, India Ratings and Research.