October 14, 2016 01:30 CDT

Consensus Actual Previous
Y/Y % change 3.90% 3.57% 3.74%

India's wholesale price index increased by 3.57 percent year-on-year in September, down slightly from 3.74 percent in August and below the consensus forecast of 3.90 percent. After rising steadily since mid-2015, WPI inflation has now stalled in the last few months. The moderation in wholesale price pressures in September is also in line with the drop in consumer price inflation reported earlier this week.

As with CPI inflation, the fall in WPI inflation in September was mainly driven by food. Helped by near-normal rainfall levels during the annual monsoon season, wholesale food price inflation fell sharply for the second consecutive month in September to 5.75 percent from 8.23 percent in August. This outweighed the impact of a sharp acceleration in wholesale fuel price inflation from 1.62 percent to 5.58 percent. Wholesale manufacturing price inflation was relatively steady, picking up slightly from 2.42 percent in August to 2.48 percent in September.

After cutting policy rates last week, officials at the Reserve Bank of India will welcome this week's data showing that price pressures have eased in recent months. This suggests consumer inflation will remain within the target range of 2.0 percent to 6.0 percent in coming months, with any further falls in key inflation measures likely to strengthen the case for another cut in policy rates.

The Wholesale Price Index (WPI) covers primary articles, manufactured products and fuel and power. The data are not seasonally adjusted and the main focus in on the annual change in the index. This can be seen as an indicator of pipeline price pressures and is a loose leading indicator of consumer price inflation as targeted by the RBI.

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.