It measures the short term changes in the volume of production of a basket of industrial products during a given period of time. IIP has a base year of 2004-05.
IIP is an indicator of increase/decrease in production and industrial activity.
Relevance of Indices
RBI uses CPI to design its monetary policy and Government uses it to monitor price stability. WPI is used by the Government to design its economic policies. IIP data is used for policy planning.
Why is there a difference in indices?
Over the years, CPI and WPI provided paradoxical results.
According to former RBI governor Duvvuri Subbarao, "Some of these differences could be statistical. However, there might be other reasons like higher transaction costs, taxes, etc. that are reflected in CPI but not in WPI."
Food price Inflation is the major factor. WPI unlike CPI takes into account the wholesale prices rather than consumer prices.
16 Jul 2015
CPI and WPI poles apart yet again
India's inflation figures indicated by CPI and WPI point towards different directions.
While there was a surge in CPI at 5.4%, the WPI figures continued to trend in the negative at -2.4%.
The divergence in the indices is ambiguous and a reason enough for RBI to not cut their interest rates.
Relation between RBI rates and Indices.
When there is an increase in inflation (CPI), it is tackled by RBI by increasing the repo rate which leads to an increase in interest rates by banks in turn reducing consumption.