diff --git a/packages/react-dev-utils/README.md b/packages/react-dev-utils/README.md
index 42e12c2f91d..f63febe7c65 100644
--- a/packages/react-dev-utils/README.md
+++ b/packages/react-dev-utils/README.md
@@ -326,3 +326,40 @@ module.exports = {
   // ...
 }
 ```
+
+#### `getCSSModuleLocalIdent(context: Object, localIdentName: String, localName: String, options: Object): string`
+
+Creates a class name for CSS Modules that uses either the filename or folder name if named `index.module.css`.
+
+For `MyFolder/MyComponent.module.css` and class `MyClass` the output will be `MyComponent.module_MyClass__[hash]`
+For `MyFolder/index.module.css` and class `MyClass` the output will be `MyFolder_MyClass__[hash]`
+
+```js
+const getCSSModuleLocalIdent = require('react-dev-utils/getCSSModuleLocalIdent');
+
+// In your webpack config:
+// ...
+module: {
+   rules: [
+    {
+      test: /\.module\.css$/,
+      use: [
+        require.resolve('style-loader'),
+        {
+          loader: require.resolve('css-loader'),
+          options: {
+            importLoaders: 1,
+            modules: true,
+            getLocalIdent: getCSSModuleLocalIdent,
+          },
+        },
+        {
+          loader: require.resolve('postcss-loader'),
+          options: postCSSLoaderOptions,
+        },
+      ],
+    }
+   ]
+}
+```
+
diff --git a/packages/react-dev-utils/getCSSModuleLocalIdent.js b/packages/react-dev-utils/getCSSModuleLocalIdent.js
new file mode 100644
index 00000000000..d1cd22a4e05
--- /dev/null
+++ b/packages/react-dev-utils/getCSSModuleLocalIdent.js
@@ -0,0 +1,37 @@
+/**
+ * Copyright (c) 2015-present, Facebook, Inc.
+ *
+ * This source code is licensed under the MIT license found in the
+ * LICENSE file in the root directory of this source tree.
+ */
+
+'use strict';
+
+const loaderUtils = require('loader-utils');
+
+module.exports = function getLocalIdent(
+  context,
+  localIdentName,
+  localName,
+  options
+) {
+  // Use the filename or folder name, based on some uses the index.js / index.module.css project style
+  const fileNameOrFolder = context.resourcePath.endsWith('index.module.css')
+    ? '[folder]'
+    : '[name]';
+  // Create a hash based on a the file location and class name. Will be unique across a project, and close to globally unique.
+  const hash = loaderUtils.getHashDigest(
+    context.resourcePath + localName,
+    'md5',
+    'base64',
+    5
+  );
+  // Use loaderUtils to find the file or folder name
+  const className = loaderUtils.interpolateName(
+    context,
+    fileNameOrFolder + '_' + localName + '__' + hash,
+    options
+  );
+  // remove the .module that appears in every classname when based on the file.
+  return className.replace('.module_', '_');
+};
diff --git a/packages/react-scripts/config/webpack.config.dev.js b/packages/react-scripts/config/webpack.config.dev.js
index 398b8bf53b7..fd18d23d255 100644
--- a/packages/react-scripts/config/webpack.config.dev.js
+++ b/packages/react-scripts/config/webpack.config.dev.js
@@ -17,6 +17,7 @@ const InterpolateHtmlPlugin = require('react-dev-utils/InterpolateHtmlPlugin');
 const WatchMissingNodeModulesPlugin = require('react-dev-utils/WatchMissingNodeModulesPlugin');
 const eslintFormatter = require('react-dev-utils/eslintFormatter');
 const ModuleScopePlugin = require('react-dev-utils/ModuleScopePlugin');
+const getCSSModuleLocalIdent = require('react-dev-utils/getCSSModuleLocalIdent');
 const getClientEnvironment = require('./env');
 const paths = require('./paths');
 
@@ -269,7 +270,7 @@ module.exports = {
                 options: {
                   importLoaders: 1,
                   modules: true,
-                  localIdentName: '[path]__[name]___[local]',
+                  getLocalIdent: getCSSModuleLocalIdent,
                 },
               },
               {
diff --git a/packages/react-scripts/config/webpack.config.prod.js b/packages/react-scripts/config/webpack.config.prod.js
index b3c4a602cd4..67fa18150a3 100644
--- a/packages/react-scripts/config/webpack.config.prod.js
+++ b/packages/react-scripts/config/webpack.config.prod.js
@@ -19,6 +19,7 @@ const InterpolateHtmlPlugin = require('react-dev-utils/InterpolateHtmlPlugin');
 const SWPrecacheWebpackPlugin = require('sw-precache-webpack-plugin');
 const eslintFormatter = require('react-dev-utils/eslintFormatter');
 const ModuleScopePlugin = require('react-dev-utils/ModuleScopePlugin');
+const getCSSModuleLocalIdent = require('react-dev-utils/getCSSModuleLocalIdent');
 const paths = require('./paths');
 const getClientEnvironment = require('./env');
 
@@ -306,7 +307,7 @@ module.exports = {
                         minimize: true,
                         sourceMap: shouldUseSourceMap,
                         modules: true,
-                        localIdentName: '[path]__[name]___[local]',
+                        getLocalIdent: getCSSModuleLocalIdent,
                       },
                     },
                     {
@@ -422,7 +423,7 @@ module.exports = {
     // having to parse `index.html`.
     new ManifestPlugin({
       fileName: 'asset-manifest.json',
-      publicPath: publicPath
+      publicPath: publicPath,
     }),
     // Generate a service worker script that will precache, and keep up to date,
     // the HTML & assets that are part of the Webpack build.
diff --git a/packages/react-scripts/fixtures/kitchensink/integration/webpack.test.js b/packages/react-scripts/fixtures/kitchensink/integration/webpack.test.js
index bba497c49f3..ae8dcfe5796 100644
--- a/packages/react-scripts/fixtures/kitchensink/integration/webpack.test.js
+++ b/packages/react-scripts/fixtures/kitchensink/integration/webpack.test.js
@@ -24,10 +24,13 @@ describe('Integration', () => {
     it('css modules inclusion', async () => {
       const doc = await initDOM('css-modules-inclusion');
 
+      expect(
+        doc.getElementsByTagName('style')[0].textContent.replace(/\s/g, '')
+      ).to.match(/.+style_cssModulesInclusion__+\{background:.+;color:.+}/);
       expect(
         doc.getElementsByTagName('style')[0].textContent.replace(/\s/g, '')
       ).to.match(
-        /.+__style-module___cssModulesInclusion+\{background:.+;color:.+}/
+        /.+assets_cssModulesIndexInclusion__+\{background:.+;color:.+}/
       );
     });
 
diff --git a/packages/react-scripts/fixtures/kitchensink/src/features/webpack/CssModulesInclusion.js b/packages/react-scripts/fixtures/kitchensink/src/features/webpack/CssModulesInclusion.js
index 0f96ae161fb..05339e3fae1 100644
--- a/packages/react-scripts/fixtures/kitchensink/src/features/webpack/CssModulesInclusion.js
+++ b/packages/react-scripts/fixtures/kitchensink/src/features/webpack/CssModulesInclusion.js
@@ -7,7 +7,13 @@
 
 import React from 'react';
 import styles from './assets/style.module.css';
+import indexStyles from './assets/index.module.css';
 
 export default () => (
-  <p className={styles.cssModulesInclusion}>CSS Modules are working!</p>
+  <div>
+    <p className={styles.cssModulesInclusion}>CSS Modules are working!</p>
+    <p className={indexStyles.cssModulesInclusion}>
+      CSS Modules with index are working!
+    </p>
+  </div>
 );
diff --git a/packages/react-scripts/fixtures/kitchensink/src/features/webpack/assets/index.module.css b/packages/react-scripts/fixtures/kitchensink/src/features/webpack/assets/index.module.css
new file mode 100644
index 00000000000..f1c6d7d19be
--- /dev/null
+++ b/packages/react-scripts/fixtures/kitchensink/src/features/webpack/assets/index.module.css
@@ -0,0 +1,4 @@
+.cssModulesIndexInclusion {
+  background: darkblue;
+  color: lightblue;
+}
diff --git a/packages/react-scripts/package.json b/packages/react-scripts/package.json
index 352484fe1e8..66359e30661 100644
--- a/packages/react-scripts/package.json
+++ b/packages/react-scripts/package.json
@@ -50,6 +50,7 @@
     "html-webpack-plugin": "2.30.1",
     "identity-obj-proxy": "3.0.0",
     "jest": "22.1.2",
+    "loader-utils": "^1.1.0",
     "object-assign": "4.1.1",
     "postcss-flexbugs-fixes": "3.2.0",
     "postcss-loader": "2.0.10",
diff --git a/packages/react-scripts/template/README.md b/packages/react-scripts/template/README.md
index 5f00b482f59..5495e320f06 100644
--- a/packages/react-scripts/template/README.md
+++ b/packages/react-scripts/template/README.md
@@ -518,23 +518,23 @@ If you are concerned about using Webpack-specific semantics, you can put all you
 <!---
 ## Adding a CSS Modules stylesheet
 
-This project supports [CSS Modules](https://github.com/css-modules/css-modules) alongside regular stylesheets using the **[name].module.css** file naming convention. CSS Modules allows the scoping of CSS by automatically creating a unique classname of the format **[dir]\_\_[filename]___[classname]**.
+This project supports [CSS Modules](https://github.com/css-modules/css-modules) alongside regular stylesheets using the **[name].module.css** file naming convention. CSS Modules allows the scoping of CSS by automatically creating a unique classname of the format **[filename]\_[classname]\_\_[hash]**.
 
 An advantage of this is the ability to repeat the same classname within many CSS files without worrying about a clash.
 
 ### `Button.module.css`
 
 ```css
-.button {
-  padding: 20px;
+.error {
+  background-color: red;
 }
 ```
 
 ### `another-stylesheet.css`
 
 ```css
-.button {
-  color: green;
+.error {
+  color: red;
 }
 ```
 
@@ -542,25 +542,27 @@ An advantage of this is the ability to repeat the same classname within many CSS
 
 ```js
 import React, { Component } from 'react';
-import './another-stylesheet.css'; // Import regular stylesheet
 import styles from './Button.module.css'; // Import css modules stylesheet as styles
+import './another-stylesheet.css'; // Import regular stylesheet
+
 
 class Button extends Component {
   render() {
-    // You can use them as regular CSS styles
-    return <div className={styles.button} />;
+    // reference as a js object
+    return <button className={styles.error}>Error Button</button>;
   }
 }
 ```
 ### `exported HTML`
-No clashes from other `.button` classnames
+No clashes from other `.error` class names
 
 ```html
-<div class="src__Button-module___button"></div>
+<!-- This button has red background but not red text -->
+<button class="Button_error_ax7yz"></div>
 ```
 
 **This is an optional feature.** Regular html stylesheets and js imported stylesheets are fully supported. CSS Modules are only added when explictly named as a css module stylesheet using the extension `.module.css`.
---->
+-->
 
 ## Post-Processing CSS