Mon Jun 15 01:30:00 CDT 2015

Consensus Actual Previous
Y/Y % change -2.50% -2.36% -2.65%

Indian WPI deflation eased a little more quickly than expected in May. Even so, at minus 2.36 percent the annual change in prices was still below zero for a seventh consecutive month and indicative of falling pipeline pressures on the targeted CPI.

Indeed, prices in the key manufacturing sector were down 0.64 percent on the year or 0.12 percentage points more than reported in April. Food inflation was also weaker, sliding almost a full 2 percentage points to 3.8 percent. Consequently, the modest acceleration in the headline index essentially reflected a partial recovery in fuel costs which stood 10.51 percent lower than in May 2014 after a 13.03 percent annual decline in April.

The diminution in price pressures suggested by today's report will be carefully considered by the RBI. In particular with official forecasts showing rainfall this year at just 88 percent of its historic norm and talk of a possible contraction in the farm economy for the first time in more than a decade, the decline in food inflation will certainly not be taken for granted. In fact the central bank has already indicated that this month's cut in interest rates could be seen as front-end loading. The next monetary ease looks unlikely to be delivered any time soon.

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.