India's consumer price index rose 5.22 percent on the year in December, moderating from an increase of 5.48 percent in November. This keeps headline inflation within the Reserve Bank of India's target range of two percent to six percent for the second consecutive month after a move above that range in October.

The move lower in headline inflation was driven by food prices, which had spiked higher in recent months. Food and beverage prices rose 7.69 percent on the year, down from the 8.20 percent increase recorded previously, while fuel and light charges fell at less pronounced rate, down 1.39 percent on the year after a previous decline of 1.83 percent. Inflation in urban areas fell from 4.89 percent in November to 4.58 percent in December, while inflation in rural areas slowed from 5.95 percent to 5.76 percent.

At the RBI's most recent policy meeting, held last month, officials left policy rates on hold at 6.50 percent but cut bank reserve requirements by 50 basis points. Officials noted risks to the inflation outlook and kept their policy stance"neutral". This, they judge, will provide them with greater flexibility in upcoming meetings while enabling them to continue monitoring the path of disinflation. They also repeated their earlier pledge to remain focused on achieving"a durable alignment of the headline CPI inflation with the target".

Slower food price inflation is expected to help annual CPI slow to a 5.29 percent increase in December from 5.48 percent in November. That would tend to support the view that the Reserve Bank of India will cut rates in February.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Within the overall CPI basket, food (47 percent) has easily the largest weight of any of the major components and a separate consumer foods price index is also released. Monthly and annual changes in the CPI provide widely used measures of inflation and the latter is the policy target of the Reserve Bank of India (RBI).

CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators.

CPI numbers presently compiled and released at national level for India reflect the fluctuations in retail prices pertaining to specific segments of population in the country -- industrial workers, agricultural labourers and rural labourers. These indexes do not encompass all the segments of the population in the country and as such do not reflect true picture of the price behavior in the country. To overcome the above, the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling new series of CPI for the entire urban population or CPI (Urban) and CPI for the entire rural population or CPI (Rural), which reflect the changes in the price levels of various goods and services consumed by the urban and rural population.