CPI is central to India's inflation-targeting monetary policy framework. Analyse how outdated base years can distort policy outcomes.

Q. CPI is central to India's inflation-targeting monetary policy framework. Analyse how outdated base years can distort policy outcomes. (15 marks, 250-350 words)

Under the Flexible Inflation Targeting framework, the RBI's Monetary Policy Committee is mandated to hold headline CPI inflation at 4% (±2%). Since MoSPI compiles the index and the RBI only targets it, the credibility of policy rests on how faithfully the CPI basket mirrors actual household consumption — a fidelity that decays as the base year ages.

CPI as the anchor of the framework - CPI is the single target variable for the MPC; repo rate decisions, liquidity operations and inflation expectations management all key off it. - It is also the deflator for real interest rates, and the escalator for DA, wage indexation and welfare transfers — so index error propagates well beyond monetary policy.

How an outdated base distorts outcomes - Stale weights: the 2012=100 series drew weights from 2011-12 consumption. Over a decade of urbanisation, rising incomes and services growth left food over-weighted and services under-weighted [1]. - Measurement bias in the target: over-weighted food transmits volatile supply shocks into headline inflation, pushing the MPC toward rate action against price movements monetary policy cannot correct. - Missing consumption: the old basket omitted digital and e-commerce spending; the revised series expands the weighted basket from 299 to 358 items (services 40→50) [1]. - Narrow price capture: prices drawn only from physical markets ignore online price formation, understating a fast-growing channel [2]. - Cumulative policy cost: a biased index means real rates, welfare indexation and fiscal projections are all mis-set — errors compound across the economy.

Corrective direction - New base 2024=100, released 12 February 2026, with weights from HCES 2023-24 and COICOP 2018 classification for global comparability [1]. - Coverage widened to 1,465 rural and 1,395 urban markets across 434 towns, plus 12 online markets in towns above 25 lakh population [2].

An inflation target is only as sound as the index measuring it. The 2024 revision restores that measurement base; institutionalising shorter, rule-bound revision cycles — as recommended by the Expert Group on CPI updation [3] — would ensure the MPC always acts on prices households actually pay.

(~325 words)

Sources: 1. FAQs on CPI 2024 Series, MoSPI (Annexure V) — HCES 2023-24 weights, COICOP 2018, basket expansion 299→358 items, services 40→50 2. PIB: MoSPI revised base year of CPI from 2012=100 to 2024=100 — 1,465 rural and 1,395 urban markets, 434 towns, 12 online markets 3. Expert Group Report on Comprehensive Updation of CPI, MoSPI — methodology and revision recommendations