for industrial workers, agricultural workers and nonagricultural rural workers. The CPI for industrial workers was commonly used as a proxy for the composite CPI.<sup>12</sup> A unified CPI series has been available since January 2011. It can be used to calculate monthly year-over-year inflation starting in January 2012. Whereas the RBI used the WPI in monetary policy analysis until about March 2014, it now utilizes the headline CPI.<sup>13</sup> The WPI consists of the prices of bulk transactions of goods in the domestic market. It includes manufacturing and commodities but not services (see Table 2).

CPI inflation has been higher than WPI inflation on average. Whereas the average difference between CPI and WPI inflation was 0.4 percent between 1997 and 2009, it widened to 3.2 percent in 2009-2019. Divergences between the two series can be attributed both to food inflation (which has a higher weight in the CPI) and manufacturing inflation (which has a larger weight in the WPI).

**Table 2: Composition of the Wholesale Price Index and Headline Consumer Price Index**

||**WPI**||**CPI**|
|---|---|---|---|
|Primary products/food|22.6|Food,Beverages and Tobacco|48.2|
|Fuel|13.2|Fuel & Light|6.8|
|Manufactured|64.2|Housing|10.1|
|||Miscellaneous|28.3|
|||Clothing& Footwear|6.5|

The question is which series the RBI should target. The WPI may not be best for two reasons. First, it places a large weight on oil and commodity prices, which are volatile; second, it has a zero weight on services. Headline CPI inflation is also affected by volatile commodity prices, albeit to a lesser extent than the WPI. More importantly, food prices account for nearly half of the CPI, and food prices are often heavily affected by sector-specific non-monetary factors such as weather and harvests. Insofar as shocks to food prices are transient, there is an argument that the RBI should look through them.<sup>14</sup> Such arguments favor a core (non-food- non-fuel) CPI. Counterarguments favoring headline inflation include: (i) that it is easier to explain to the public and thus more effective in anchoring expectations; and (ii) that 12 There have been five different CPI series: CPI Industrial Workers (CPI-IW), CPI Agricultural Labor (CPI-AL), CPI Rural Labor (CPI-RL), and the CPI Urban Non-Manual Employees (CPIUNME). The last one of these has been discontinued. The weights of different components in the baskets for CPI combined, and CPI-Industrial worker are similar; whereas the CPI for agricultural labor and CPI for rural workers have a larger weight on food, nearly 70 percent. See Mohan and Ray (2018) for a discussion of the composition and dynamics of different inflation series. 13 When estimating reaction functions, we follow this practice, using the CPI inflation starting 2012 and WPI inflation before that.

14 Relatedly, it has been argued (by inter alia Banerjee 2020) that IT has led to a worsening of the agricultural terms of trade and declining rural/agricultural incomes. Variants of this argument are that the government has grown more reluctant to raise support prices for agricultural products because it wishes to help the RBI to lower inflation, or that it has grown more reluctant because it fears the wider repercussions on the economy of the RBI raising interest rates in response. We find the first variant implausible (helping the RBI hit its inflation target is not a government priority). The second variant amounts to the statement that government support for the rural sector costs the economy as a whole through either higher inflation or higher interest rates. The 2015 inflation targeting agreement reflected a consensus that taking these costs in the form of inflation was higher than taking them in the form of interest rates. We do not see what has changed.

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