The Consumer Price Index (CPI) is a measure of the average price level of a basket of goods and services consumed by households in a country. In India, the CPI is used as a measure of inflation, which is the rate at which the general price level of goods and services is rising. The CPI is calculated by the Central Statistics Office (CSO) and is based on the prices of a basket of goods and services consumed by households in urban and rural areas.

In India, there are different types of CPIs that are used to measure inflation. The most widely used one is the CPI (Retail) inflation, which measures the average change in the prices of goods and services consumed by households in urban and rural areas. This index is calculated using the data collected from selected towns and villages, which are divided into three broad groups: rural, urban, and combined.

Another type of CPI that is used in India is the CPI (Rural) inflation, which measures the average change in the prices of goods and services consumed by households in rural areas. This index is calculated using data collected from selected villages and is considered to be a more accurate reflection of the inflation experienced by rural households.

The CPI (Urban) inflation is another type of CPI that is used in India, it measures the average change in the prices of goods and services consumed by households in urban areas. This index is calculated using data collected from selected towns and is considered to be a more accurate reflection of the inflation experienced by urban households.

The weighting of each item in the basket of goods and services is determined by the National Sample Survey Office (NSSO) based on the consumption patterns of households in India. The basket of goods and services is reviewed periodically to ensure that it remains representative of the consumption patterns of households in India.

The CPI is an important economic indicator as it helps policymakers, businesses, and households to understand the trend of inflation in the country. The Reserve Bank of India (RBI) uses the CPI as one of the key indicators to determine the monetary policy stance, such as setting the benchmark interest rate.

There are some limitations to using the CPI as a measure of inflation. One of the main limitations is that it only measures the change in the prices of a basket of goods and services consumed by households, and does not take into account changes in the prices of goods and services consumed by firms. Additionally, the CPI may not always accurately reflect the inflation experienced by certain groups of households, such as the poor or the elderly.

Despite these limitations, the CPI remains an important economic indicator and is widely used as a measure of inflation in India. The government and the central bank closely monitor the CPI to understand the trend of inflation and take appropriate measures to address it.