Every inflation debate in India happens to begin and end at home. The interplay of rainfall patterns, onion production cycles, and monetary policy decisions such as repo rate adjustments, has traditionally formed the familiar trinity of every RBI bulletin and newspaper commentary.
However, the prices of today are no longer written solely in Nashik’s fields or North Block’s corridors; they are also decided by global economic forces, including distant ports, shipping lanes, and commodity exchanges around the world.
Over the past three years, India’s inflationary trends have been significantly shaped by both global disruptions and domestic conditions. Factors such as container shortages, export restrictions, and elevated freight costs have all directly impacted household expenditures in India. For instance, the 2022 restriction on palm oil exports by Indonesia led to an increase in cooking oil prices within Indian households, notwithstanding stable domestic supply. Similarly, the post-pandemic quintupling of freight costs resulted in higher prices for electronics and appliances, even in the absence of localised economic shocks.
Consequently, global market dynamics, ranging from crude oil prices to semiconductor availability, have increasingly become integrated into India’s price index.
The global grip on Indian prices
The numbers confirm the significant influence of global economic dynamics on Indian price levels. In December 2024, the year-on-year inflation rate stood at 5.22 per cent, with food inflation concurrently reaching 8.39 per cent. By April 2025, retail inflation dropped to 3.16 per cent, marking the lowest reading since July 2019. Even in July 2025, when inflation eased further to around 1.55 per cent, this calm owed as much to softer global commodity prices as to domestic stability.
Nevertheless, a reduction in headline inflation does not imply the disappearance of external economic influences. The approximately 1.2 per cent depreciation of the rupee in the fiscal year 2024 had already increased the cost of imported inputs across various sectors. India’s continued dependence on imports for over 85 per cent of its crude oil requirements leaves it susceptible to global oil price volatility. These inherent external pressures imply that even amidst moderate headline inflation, trade exposures deeply impact domestic cost structures.
Guidance from the Reserve Bank of India reinforces this nuanced perspective. In its recent policy outlook, the RBI substantially revised its Consumer Price Index (CPI) projection for the fiscal year 2026 downward to 2.6 per cent from an earlier estimate of 3.1 per cent. Quarterly forecasts indicate low inflation in Q2 and Q3 (approximately 1.8 per cent). These shifts demonstrate that while headline inflation is moderating, external factors continue to exert pressure on prices. Without a robust way to measure these external influences, policy interventions risk misdiagnosing the underlying nature of inflationary pressures.
The missing measure
Despite evident exposure to international economic forces, India currently lacks a quantitative metric that can evaluate how much inflation it actually imports. We rely entirely on the headline CPI and its derivative “core inflation”, which excludes volatile food and fuel components. However, neither of these measures adequately reveals the mechanisms through which global trade dynamics, exchange rate fluctuations, or imported intermediate inputs influence domestic consumer prices.
That is the gap a Trade Exposure Inflation Index (TEII) could fill. TEII would disaggregate inflation into three interconnected channels: the direct pass-through from imported consumer goods (such as electronics, gold, edible oils), the embedded cost associated with imported intermediate goods (fertilizers, plastics, active pharmaceutical ingredients), and the exchange rate pass-through effect, which pushes up prices of import-sensitive goods whenever the rupee depreciates.
By applying CPI weights, TEII would provide a monthly estimation of the proportion of inflation attributable to external factors. This index would not replace CPI, but would function as a complementary indicator, just as how “core inflation” complements headline measures.
The implementation of a TEII would enable an unambiguous determination. For instance, in a given year such as 2024, approximately 40 per cent of inflation was trade-exposed. This would empower policymakers to see the months in which global shocks dominate, and the months in which domestic demand is the real culprit.
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Data anchors for TEII construction
The development of a TEII index is not a pipe dream; the data is largely available. The Ministry of Statistics and Programme Implementation (MoSPI) publishes comprehensive data on CPI weights and disaggregated sub-group movements. Concurrently, the Directorate General of Commercial Intelligence and Statistics (DGCI&S) provides import-dependency data categorised by commodity groups, while the RBI and various academic studies offer estimations of exchange rate pass-through. Current data indicates substantial import and input dependencies across several CPI categories, including fuel and light (6.8 per cent weight), transport and communication (8.6 per cent), household goods (3.8 per cent), and personal care (3.9 per cent).
Considering that in the fiscal year 2024, headline CPI inflation averaged approximately 5.4 per cent, the estimated contributions from trade-exposed segments, specifically imported edible oils, pulses, electronics, and crude-linked inputs, already suggest that approximately 40 per cent of inflation may be attributable to external factors. The TEII would enable the formalisation and refinement of such approximations on a monthly or quarterly basis.
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Sharper policy, smarter coordination
Had India implemented a TEII to monitor trade-exposed inflation during 2022–24, the resulting policy framework might have looked very different. The RBI increased policy rates by 250 basis points between May 2022 and February 2023 to mitigate inflationary pressures. However, a significant proportion of these pressures were externally driven and thus less responsive to monetary tightening. Acknowledging that approximately two-fifths of the inflation was imported, the RBI and the Ministry of Finance could have collaborated on complementary trade or fiscal interventions — such as tariff waivers, import duty reductions, or strategic stock releases — in order to alleviate household burdens without stalling economic growth.
Furthermore, the TEII could actually sharpen India’s trade strategy. It could be used to sequence the free trade agreements (FTAs) intelligently, prioritising agreements likely to reduce the external inflation burden (for example, through cheaper pharmaceuticals or capital goods) and delaying those that might exacerbate it (for example, high-tariff agricultural products, dairy, or automobiles). Tariff policy could also become countercyclical; a surge in TEII within a specific sector could automatically trigger targeted duty reductions, thereby integrating trade instruments into the inflation stabilisation toolkit.
Another substantial benefit would be enhanced transparency. A monthly publication of the TEII would enable markets, analysts, and the public to observe how much of inflation is actually imported versus how much is domestically generated. Such clarity would strengthen credibility, minimise unforeseen economic shocks, and more firmly anchor inflation expectations.
While critics may argue that exchange rate pass-through in India is modest — estimated at approximately 7 per cent by the RBI — even a minor coefficient, when applied to a large import base, can significantly influence prices, particularly during periods of sharp currency fluctuations when transmission intensifies.
Concerns regarding technical complexity are overstated, as India already possesses the necessary data infrastructure, including the MoSPI’s CPI breakdowns, the DGCI&S import matrices, and the RBI’s sensitivity studies. A joint working group comprising these institutions could pilot a TEII within a year. The real challenge is political rather than technical, as the TEII would reveal the extent to which India’s inflation is influenced by factors beyond domestic control. Nevertheless, transparency should be regarded as strength, not a vulnerability. No major emerging economy currently maintains a public index of imported inflation; while the International Monetary Fund (IMF) and the Bank of International Settlements (BIS) monitor aggregate data, none provide real-time measurements of national trade-exposed inflation.
India can lead by doing so. Our inflation story is no longer solely dictated by monsoons or repo rates; it is increasingly shaped by global trade dynamics, freight costs, and currency shocks. Without accurately measuring these influences, there is a risk of fighting the wrong battle with the wrong tools. In a world where disruptions such as a Red Sea bottleneck can increase the price of pakoras in Patna, the TEII represents a critical analytical tool for India’s inflation policy.
Bidisha Bhattacharya is an Associate Fellow, Chintan Research Foundation. She tweets @Bidishabh. Views are personal.
(Edited by Aamaan Alam Khan)