Wed Jan 14 00:30:00 CST 2015

Consensus Actual Previous
Y/Y % change 0.6% 0.11% 0.00%

WPI inflation accelerated in December but not by much and by significantly less than market expectations. In fact at 0.11 percent, the yearly change in wholesale prices was little changed from its mid-quarter print and suggests that pipeline price pressures at year-end were relatively muted.

Even so, the comparative stability of the headline index masked sharply divergent developments amongst its basket components. Hence, while food costs were up an annual 5.20 percent after a 0.60 percent increase in November, fuel posted a 7.82 percent decline following a 4.90 percent drop last time. Manufacturing inflation fell nearly 0.5 percentage points to 1.57 percent.

Overall the December results should be viewed quite positively by those hoping that the RBI will cut official interest rates next month.

The wholesale price index tracks the average changes in price of a fixed representative basket of wholesale goods. The basket includes goods from the most important sectors in India's economy, such as: food products, fuel and power, textiles, rubber, metal products, machinery and chemicals. It is calculated using a weighted arithmetic average of wholesale prices. The WPI is one of the Reserve Bank of India's inflation measures.

The Wholesale Price Index is closely followed as an indicator of inflation by the Reserve Bank of India, as well as many Indian corporations and banks.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the WPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the WPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.