Mon Sep 14 01:30:00 CDT 2015

Consensus Actual Previous
Y/Y % change -4.4% -4.95% -4.05%

Inflation at the wholesale level continued to fall last month. A 4.95 percent yearly drop in prices was sharper than expected and significantly steeper than seen in July.

Weakness was particularly apparent in fuel where the annual rate declined from minus 12.8 percent at the start of the quarter to minus 16.5 percent but increased deflationary pressure was also apparent in manufacturing (minus 1.92 after minus 1.47). At the same time, a rise in the rate in the food sector (minus 1.13 from minus 1.20) was only minor.

The WPI data increase the likelihood of August CPI inflation, due later today, falling further and below its 3.78 percent record trough established in July. If so, speculation about another, and potentially sizeable, RBI rate cut on 29th September 29th will become all the more intense.

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.