Mon Mar 16 01:30:00 CDT 2015

Consensus Actual Previous
Y/Y % change -0.70% -2.06% -0.39%

WPI inflation was much weaker than expected last month. A minus 2.06 percent print meant that February was the second month in a row in which the annual rate has been below zero and suggests that any further acceleration in CPI inflation should continue modest and pose no threat to the RBI's price stability goals.

Inevitably weaker energy costs provided most of the downside pressure and fuel charges were some 14.7 percent lower on the year. However, food inflation also eased slightly to 7.7 percent and the rate in manufacturing dropped to just 0.3 percent.

CPI inflation last month (5.37 percent) was on the firm side of market expectations but still comfortably below its 6 percent interim target set for next January. The broad-based weakness of today's WPI report increases the likelihood of the RBI undershooting this mark on unchanged policy and should accordingly boost hopes of another cut in official interest rates before long.

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.