RBI Chief: Consumer inflation data not robust enough

The RBI uses wholesale price index as its main inflation indicator although it also monitors consumer prices

The Reserve Bank of India (RBI) said on Friday that the large magnitude of the short-term divergence between the Wholesale Price Index (WPI) and Consumer Price Index (CPI) is a challenge for accessing inflation dynamics.

"The large magnitude of the short-term divergence between the two indexes possess a major challenge for accessing inflation dynamics in the short-term," said D Subbarao, governor of RBI in Mumbai.

Subbarao was speaking about some of the dilemmas RBI faces in making policy because of the constraints of data.

"Determining an appropriate measure is critical. Other central banks use CPI because that reflects the welfare objective of monetary policy. In India, we have a problem of excess of inflation measures. We traditionally use WPI because we thought that the legacy CPIs were not representative enough for the entire population," said Subbarao.
 
According to him in India WPI has been more extensively researched because of its empirical relationships with other variables such as output, monetary aggregated and interest rates.

Besides that the new CPI does not have many data points for a robust statistical analysis.