New CPI basket shows that India’s expenditure pattern has changed

The changes ensure that payments such as dearness allowance or pensions, that are linked to the CPI, will be more closely based on the true consumption baskets of households.

17 February, 2026
The Print

The government recently announced a revised Consumer Price Index basket. Inflation is the percentage change of the Consumer Price Index over time. Inflation statistics determine how we interpret growth, assess macro stability, and protect real incomes.

The Consumer Price Index (CPI) is the nominal anchor of macroeconomic policy. This makes the new basket an important development, one with implications for everything built around the CPI, such as monetary policy, pension indexation, and fiscal arithmetic. The benefits of this revision will be fully realised when the authorities publish a properly backdated series so that the new CPI can be compared with earlier data.

What has changed?

The basis for measuring inflation is the cost of a “basket” of goods and services that a typical household consumes (food, rent, mobile phone, laptop, fuel, transport, health, education, etc). The expenditure on these items is measured through a household survey. Each item is given a weight based on how much people spend on it. The base year is one which reflects the year of the survey. Once the basket is fixed, one can measure how much the basket costs every quarter, or every year, to know how much more expensive (or not) the same goods and services are.

It should be no surprise that the “basket” of a typical household changes. Twenty years ago, smartphones were perhaps not as common, and ten years from now, subscriptions to the latest AI models will be ubiquitous. A basket based on older consumption data would overweight items that matter less today and underweight items that now take up a larger share of household budgets. This means that we need a change not only in the items in the basket, but also the weight of each item.

For example, as a household grows richer, the share of expenditure on food declines, as the household is now spending on other goods— education, healthcare, digital goods, etc. A good statistical system, therefore, has to continuously update the consumption basket to ensure that it correctly represents what households consume.

The new CPI basket reflects these changes. For example, in the new basket, the weight of food has declined modestly, while items such as healthcare, education, transport, communication, and recreation have gained weight. There have also been methodological improvements in price collection, including greater use of digital systems and updated sampling strategies.

These are welcome changes. They ensure that when the RBI targets CPI inflation, it will be targeting the lived consumption experience of households. The changes also ensure that payments such as dearness allowance or pensions, that are linked to the CPI, will be more closely based on the true consumption baskets of households.

The importance of comparability

Updating the consumption basket is an important step. But it does create another problem—how do we compare inflation across time? If the basket of yesterday is different from the basket of today, the change in its price does not convey much information. Comparing the price of the “same” basket over time is fundamental to economic reasoning. A new basket may help us measure inflation for a few periods from now, but it doesn’t tell us how today compares to yesterday. And given that baskets will have to be over time, how does one ensure continuity?

As of now, the ministry has given us a linking factor used to connect India’s old CPI series (base 2012=100) to the new CPI series (base 2024=100). The linking factor scales the old CPI series so that it aligns with the new one at the point of overlap. With this, one can rescale the old series to understand what it would have looked like, had we used the new consumption basket. But providing a single linking factor has some disadvantages.

It assumes that the relationship between the old and new series in that year is representative of earlier years, which may not always be true. If the previous year was an abnormal year, then a one-year linking may not be representative of previous years. Further, since the weights of the components have changed (as food now has a smaller weight in the basket), a single linking factor cannot account for the changing influence of different groups on inflation trends.

There are ways to solve for this. For example, one could publish both series for a number of years. One could rebuild the old series entirely, possibly for a decade, instead of just scaling it. In doing so, it will be in line with best practices in other jurisdictions. For example, in the UK, the Office for National Statistics (ONS) updates the CPI basket frequently and revises weights using detailed expenditure data. It publishes continuous historical series and detailed methodological notes that convey how historical comparability is preserved.

The Australian Bureau of Statistics (ABS) has moved toward more frequent reweighting, increasingly using national accounts data to ensure that the CPI reflects current spending patterns. The ABS maintains historical series and links them carefully, with adequate explanations on the impact of revisions. The Ministry of Finance should institutionalise a system to revise more frequently in smaller steps so that large discontinuities can be avoided.

The new CPI basket is a step in the right direction. It recognises that India of today is not the India of a decade ago. While we update the series, preserving continuity and comparability is equally important.

India needs derivatives for high economic growth. STT hike is a bad move

A sound tax system is one based on the ability to pay or economic surplus. But the STT taxes the circulation of capital and not its returns, making it deeply distortionary.

02 February, 2026
The Print

The Union Budget 2026-27 raised the securities transaction tax or STT. Futures now face a levy of 0.05 per cent, up from 0.02 per cent; options face higher taxes on both the premium and the exercise. It is no surprise that market indices have fallen. This is a bad move for India’s financial development and growth.

A sound tax system is one based on the ability to pay or economic surplus. An example of a direct tax is an income tax, which is based on final income. A consumption tax, such as the Goods and Services Tax (GST), is also a proxy for the ability to pay. Even a GST taxes final use, and not intermediate transactions. For example, a GST system that allows input-tax credits ensures each good or service is taxed only once—at the point of final consumption.

An STT, on the other hand, is a tax on transactions, regardless of what the transaction is for and whether it is profit or loss–making. It is like paying tax each time a potato changes hands—from a wholesaler to a retailer, and from a retailer to your kitchen—regardless of profit or loss. The tax is not on consumption or profit, but on the transaction. In the context of financial markets, the STT implies that a market maker, a speculator, and a hedger merely rolling a position pay the same tax, and pay it repeatedly. The immediate response to an STT is that people will trade less, leading to lower liquidity and poorer price discovery. Research has shown that this is the case in India. An STT taxes the circulation of capital and not its returns, making it deeply distortionary.

An attack on derivatives markets is a mistake

A higher STT on derivatives markets is often justified because derivatives are viewed as speculative and socially unproductive. In fact, the government’s stated reason for the hike is that the move is likely to curb “excessive retail speculation” in F&O markets. This is a costly way to address the concern.

Derivatives carry out two important functions. First, they are useful for hedging risk. They allow you to lock in a price today so that you are immune to future price changes. This is useful to a farmer who wants to hedge price risk or a trader who wants to hedge currency risk. Derivatives are thus risk management tools in modern markets. An STT on derivatives is effectively taxing risk management.

Second, derivatives are useful for speculation. While speculation is also often considered a bad deed, it is an action based on a view of the future. By taking certain positions, a spectator bears price risk. As a result, prices adjust faster and incorporate information more efficiently. In fact, speculation makes markets less volatile through multiple market corrections instead of one big event.

Moreover, penalising derivatives trading often fails eliminate it, but moves it elsewhere. A higher STT may make transactions shift to offshore markets, beyond the reach of the Indian regulator. A clear instance of this is when restrictions on onshore currency derivatives pushed trading into offshore NDF markets instead of eliminating speculation or hedging demand. Price discovery in the rupee is now increasingly occurring outside India, reducing transparency and regulatory visibility.

One may argue that several jurisdictions around the world also have an STT or a similar tax. However, there are differences. First, many of these jurisdictions tax capital gains at a much lower rate, while others exempt certain investors or instruments. This is not true of India, where a long-term capital gains tax (LTCG) exists in addition to the STT, and the latter is stacked on top of derivatives trading. Further, the STT has to be seen in the context of the full range of taxes—stamp duty, GST, and capital gains—all of which make India an expensive destination for foreign portfolio investors in comparison to other Asian markets.

Market impact

India aspires for high economic growth. This requires risk-taking. A modern economy requires instruments and markets to hedge risks on interest rates, currency, equity, and commodity prices. Derivatives markets play a crucial role in improving price discovery and transferring risk to those suited to bear it. By increasing taxes on derivatives transactions, India is damaging its ability to manage economic growth.

We must remember that in shallower markets such as ours, marginal trades matter far more, and hence a transaction tax is likely to affect more. What may be absorbed with little effect in deep markets can meaningfully impair market functioning in India.

It is also pertinent to evaluate how important the STT is to India’s tax revenues. In FY2024-25, STT collections were about Rs 53,095 crore, while total direct tax collections were about Rs 25.87 lakh crore—the STT made up about 2.1 per cent of total direct taxes. For a tax that can have such an outsized effect on market behaviour, it adds very little to total revenue. If the STT has been increased to meet revenue requirements, then there are other, cleaner taxes that could have been imposed. Better still, government expenditure could have been rationalised.

Budget 2026: Push for India’s bond market needs the foundations fixed first

Corporate bonds are priced as a spread over the risk-free rate. In India, the reference risk-free rate is unreliable as large institutions are mandated to buy and hold government bonds.

01 February, 2026
The Print

The Union Budget 2026 has proposed to make it easier to trade corporate bonds, introduce new risk management tools, and encourage large municipal bond issuances. It also proposes to restructure the Power Finance Corporation and the Rural Electrification Corporation.

While the exact nature of these proposals remain unclear, the foundations of bond markets must be fixed first. This includes credible pricing of government debt through a yield curve that is truly market driven, clearer commercial mandates for PFC and REC, integrated trading between government and corporate debt, and transparent municipal finances. Without these, the Budget 2026’s measures risk remaining well-intentioned signals rather than drivers of growth.

Corporate bond market, and REC-PFC

India’s corporate bond markets have grown quite rapidly in the last ten years. As of March 2025, it had touched Rs 53 lakh crore (about $600 million), and yet, this constitutes only about 10-15 per cent of total corporate debt in India. Firms continue to rely more on bank credit for their investment needs.

Why have our corporate bond markets never really taken off? The government is the largest borrower in the economy, and considered the safest. Therefore, the interest rate on government bonds (the risk-free rate) is the starting point to price all other loans. Corporate bonds are priced as a spread over the risk-free rate. In India, the reference risk-free rate is unreliable as large institutions are mandated to buy and hold government bonds. With forced buying, yields no longer fully reflect the fundamentals such as fiscal risk, and inflation expectations. Institutions such as the REC and PFC are treated as near-sovereign despite near-bankrupt state distribution companies being one of their largest borrowers. This distorts the structure of interest rate further, as their bonds fall between government debt and private corporate credit.

Regulations ensure that investors are restricted to conservative mandates such as AAA or AA rated paper. Government bonds and corporate bonds are traded in different places. Government bonds mainly trade on a specialised platform run under the Reserve Bank of India’s oversight, which is used mostly by banks and large financial institutions. Corporate bonds, on the other hand, are traded on stock exchange platforms that are more familiar to equity investors. Traders and investors cannot easily move between these markets.

As a result, the risk-free rate does not convey true information. There is considerable illiquidity in several maturity buckets, and limited demand for the bonds of lower-rated but economically viable firms. Prices in one market do not quickly influence prices in the other, reducing trading activity, and making it harder to compare risks across different bonds, further slowing down price discovery. Index market making and total return swaps as proposed by the budget could help solve the liquidity problem to some extent. However, these measures depend on a trustworthy benchmark curve, which continues to elude our markets.

Municipal bonds

India’s urban infrastructure such as roads, sewage, water, and transport require large-scale investments. Most of this financing today comes from the Budget. An alternative financing mechanism is to raise bonds and spread the cost over time. Since FY2018, urban local bodies have raised between Rs 2,000-3,000 crore through bond issuances. But this activity has been restricted to only about 19 out of the 269 municipal corporations, and constitutes less than 1 per cent of the overall public sector debt.

The government appears to want to jump-start the municipal bond market with its proposal to offer a Rs 100 crore incentive for issuances exceeding Rs 1,000 crore. The fundamental problem, however, is the fiscal (ill)health of the urban bodies. Most of these have opaque non-standardised accounting, and uncertain revenue streams. Property taxes, user charges, and intergovernmental transfers can become political issues, and are often not enforced. Investors, therefore, struggle to assess credit risk or repayment capacity. Further, a threshold of Rs 1,000 crore implies that only a few large cities might be able to utilise the incentives. It is quite likely that these cities already have access to funding from the state or central government. The question remains: how will municipalities generate predictable cash flows to service debt?

Roadmap for implementation

Firms need long-term funding to make investments while municipalities or urban local bodies require financing to provide urban services. In most advanced economies, such finance is provided by bond markets as banks are ill-suited to provide long-term credit. Getting bond markets right is important for economic growth.

A genuinely market-determined government yield curve is a prerequisite for bond market deepening and development. This requires reducing financial repression through lowering mandates on financial institutions to purchase and hold government bonds. The reform of REC and PFC through clearer commercial mandates would allow their bonds to be priced on economic fundamentals. Integration of government and corporate bond trading on a single venue would deepen secondary market liquidity.

For municipal bonds, the core reform should be of cleaning up their balance sheets, providing standardised accounts, and audited disclosures. Local bodies also need to work on strengthening their own-source revenue to signal an ability-to-repay, while the government needs to build clear bankruptcy or resolution frameworks.

Only with these institutional foundations can Budget 2026’s announcements deliver meaningful and lasting impact.