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Is it Time for Reinventing Inflation Indices in India?

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  • Mita H Suthar

Abstract

With the recent rise in inflation rates in India, the policy makers, politicians and people—all are concerned about its regulation through appropriate policy measures. In reality, inflation targeting requires appropriately defined price index—be it Wholesale Price Index (WPI) or Consumer Price Index (CPI). For an open emerging economy like India, where inflation targeting may not be the sole objective of the monetary authority, interrelation among the measures of inflation, economic growth, money supply and foreign exchange rate is important. Two major price indices are relevant for measuring inflation—WPI and CPI. A more systematic econometric analysis of the annual time series beginning from 1970-71 up to 2006-07 indicates that this interrelation is stronger for the consumer price index in case of India, as far as trend behavior is concerned. However, when it comes to forecasting, WPI performs more efficiently. This calls for reinvention of the inflation index that provides a better reflection of the price fluctuations in the economy, its impact on various economic agents and also proves to be a more efficient target measure for the monetary policy of the Reserve Bank of India (RBI).

Suggested Citation

  • Mita H Suthar, 2008. "Is it Time for Reinventing Inflation Indices in India?," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(4), pages 6-17, November.
    • Handle: RePEc:icf:icfjmo:v:06:y:2008:i:4:p:6-17
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