New CPI to Measure Rural Housing Inflation: Reforming India’s Retail Inflation Index | Dhyeya IAS

Context:

The Ministry of Statistics and Programme Implementation (MoSPI) has proposed a major methodological revision in the Consumer Price Index (CPI) to make the measurement of housing inflation more robust, representative, and reflective of ground realities.

Background:

The Consumer Price Index (CPI) is the key measure of retail inflation in India and serves as the nominal anchor for the Reserve Bank of India’s (RBI) inflation-targeting framework.

In the existing CPI:

Housing carries a weight of 21.67 percent in urban areas and 10.07 percent at the all-India level.

Economists have long flagged that this approach underrepresents the true inflation experienced by households, especially given post-pandemic surges in housing rents and rising rural housing costs.

Key Features of the New CPI Methodology

The new framework, to be implemented with the upcoming CPI base revision (expected in early 2026), seeks to capture real market dynamics in both rural and urban areas.

· Rent data will now be collected monthly from all sampled dwellings, replacing the earlier six-month cycle for one-sixth of the sample.

· This expansion follows technical guidance from the International Monetary Fund (IMF) to avoid downward bias in rent estimation.

For the rural sector, data from the Household Consumption Expenditure Survey (HCES) 2023-24 which records both paid rent and imputed rent for owner-occupied houses, will be used. This marks a departure from the current system, which omitted rural housing due to the lack of comparable data in the older HCES 2011-12.

By excluding concessional or employer-provided housing, the new index eliminates distortions caused by non-market rents tied to pay scales rather than actual market rates. The reform aligns India’s CPI methodology with global best practices, enhancing the reliability of inflation indicators used by the Reserve Bank of India (RBI) and policymakers for monetary and fiscal decisions.

MoSPI has also invited public feedback on the proposal by November 20, 2025, reaffirming its commitment to transparency and stakeholder consultation.

Significance:

1. More Accurate Inflation Measurement

Housing constitutes a large share of household expenditure, and inaccuracies can distort the overall CPI. Including rural rent and removing non-market dwellings will yield a truer reflection of inflationary pressures faced by households.

2. Better Policy Formulation

Accurate CPI data are vital for:

RBI’s monetary policy under inflation targeting.
Government welfare indexing, such as dearness allowance adjustments.
Fiscal policy decisions related to subsidies, social housing, and poverty estimates.

3. Statistical Modernisation

The move aligns India’s CPI methodology with global best practices, bringing it closer to standards followed by advanced economies where both urban and rural housing indices are used to compute headline inflation.