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CPI basket to align with changing consumption pattern with potential structural benefits
A government panel is reviewing the CPI basket and the base year revision of the inflation series as the CPI was last revised in 2011-12. New CPI series with revised weightages is likely to be released from April 2025.
The revision of CPI basket is based on Household Consumption Expenditure Survey (HCES). Currently Food and beverages has 45.9% weight in CPI. As per the latest household survey, this weight of food items may be reduced by 5-6%.
The latest CPI print for the month of October 2024 was 6.2%, Food and beverages inflation was at 10% while non-food inflation was less than 3.5%. Therefore, a shift of 5-6% weight from food items to non-food items may reduce the CPI inflation by 35-40bps.
The 2023-24 Economic Survey had previously suggested excluding food from India’s inflation-targeting framework. However, while that may be debatable, the focus of RBI may change to core CPI over time while deciding on Repo rate changes. In U.S., the Federal Reserve has multiple times explicitly stated that the “core PCE” is considered as the primary measure and preferred inflation matrix while deciding on benchmark rates.
Core CPI currently is at 3.7%. Even assuming it to normalise at around 4%, it leaves enough scope to cut Repo rate by 100bps. (Assuming 150bps real rate over 4% core inflation, resulting in Repo rate at 5.5% Vs current rate of 6.5%)
Overall, all these changes are pointing towards more stable and lower Repo rate trajectory.
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