India will start releasing annual inflation data based on the consumer price index (CPI) every month starting on Tuesday, a move that is expected to make monetary policy more effective in addressing demand-driven price pressures.
It will be some time, however, before the new index replaces the wholesale price index (WPI) as India's main inflation gauge.
Unlike most central banks, which mainly use the CPI to monitor inflation and set monetary policy, the Reserve Bank of India (RBI) focuses on the WPI to keep tabs on prices.
Since the WPI largely reflects price pressures experienced by producers, reliance on it renders monetary policy less effective in cooling prices at the retail level.
"Monetary policy needs to have an impact on demand-side (price) pressures. A good and broad-based (CPI) index should help in making the policy more effective," said Anubhuti Sahay, senior economist at Standard Chartered Bank.
"We need to wait and see how this index works. Still, it is a step forward," she said, adding that it was too soon to say the CPI would replace the WPI as India's key inflation gauge.
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The CPI will also reflect price movements in the services sector, which makes up about 55% India's economy but is not included in the WPI.
The index, which uses 2010 as the base year, was introduced by the Ministry of Statistics in January 2011.
It will cover retail prices in five major food groups, fuel, clothing, housing and education across rural and urban India, providing a comprehensive reference point for policymakers.
The RBI has acknowledged the constraints the WPI data imposes on inflation management.
Governor Duvvuri Subbarao said last year that consumer demand was likely to determine the extent to which retailers would pass on any sustained increase in wholesale prices.
However, he said that in the absence of any single and better CPI data the RBI was compelled to rely on the WPI.
Inflation, as measured by the WPI, eased to a 26-month low of 6.55% in January. It stayed above 9% for 12 straight months until November, forcing the central bank to run a 20-month interest rate tightening cycle that ended in October.
The Ministry of Labour already reports three CPIs -- CPI AL (Agricultural Labourer), CPI RL (Rural Labourer)and CPI IW (Industrial Worker).
These indexes represent different segments of the population and have different base years, making them ill-equipped to capture the price behaviour caused by the rapid structural changes in the economy.
The WPI is computed on an all-India basis and is available with a slightly shorter lag than the CPIs.
It also has broader coverage in terms of the number of commodities, number of quotations and inclusion of non-agricultural products and tradeable items. Also, the revision of the basket for these CPIs lags that of the WPI.
The government uses CPI for industrial workers to fix wages for its employees. Annual consumer price inflation for industrial workers was 6.5% in December.