Mon Feb 16 00:30:00 CST 2015

Consensus Actual Previous
Y/Y % change 0.41% -0.39% 0.11%

Inflation at the wholesale level unexpectedly decelerated in January. At minus 0.39 percent, the annual WPI rate was down fully 0.5 percentage points versus its December mark and at its weakest level since June 2009.

Petrol prices were 3.9 percent lower on the month and down some 17.1 percent on the year and were largely responsible for the decline in the headline rate. However, inflation in manufacturing also dropped to just 1.05 percent. That said, it was not all one-way traffic as food inflation climbed sharply, touching a 6-month high of 8.0 percent after a 5.2 percent reading in December.

Still, following a weaker than expected January CPI financial markets should see today's report as leaving the door open for another RBI interest rate cut soon. Assuming no nasty surprises in the Budget (28th February), another 25 basis point ease should be on the cards for April.

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.