December 14, 2016 12:30 CST

Consensus Actual Previous
Y/Y % change 3.1% 3.15% 3.39%
M/M % change 0.1% 0.1%

India's wholesale price index increased by 3.15 percent year-on-year in November, down from 3.39 percent in October. After rising sharply from mid-2015 to mid-2016, WPI inflation has trended lower in recent months. The index rose 0.1 on the month in November. Broadly in line with consumer price data released earlier this week, today's data suggests that wholesales prices for perishable food items have so far been the main type of product impacted by the government's decision early in the month to withdraw high-denomination currency notes as legal tender.

The fall in WPI inflation in November was driven by primary articles, which mainly consists of foodstuffs and accounts for around 20 percent of the index. This component of wholesale price inflation has moderated significantly in recent months, falling further from 3.31 percent in October to 1.25 percent in November, with inflation for non-processed food falling from 4.34 percent to 1.54 percent.

Consistent with November CPI data, vegetable wholesale prices fell particularly sharply in November, down 24.1 percent year-on-year after dropping by 10.0 percent in October. This sharp drop in vegetable prices appears to partly reflect the impact of the government's currency withdrawal, with reports suggesting that resulting cash shortages forced many suppliers to make distress sales to clear stocks of perishable items. Weaker year-on-year increases were also recorded in November for the prices of fruit, egg, meat and fish, and potatoes, though these were partly offset by stronger increases for the prices of less perishable items such as cereals, wheat and onions.

Price pressures were stronger, however, for other categories. Wholesale prices for fuel and power (which account for around 15 percent of the index) rose 7.36 percent year-on-year in November, up from 6.18 percent in October. Wholesale prices of manufactured products, which account for around 65 percent of the index, also saw a stronger year-on-year increase, up from 2.67 percent to 3.20 percent.

This increase in inflation for manufactured products includes a slightly stronger year-on-year increase for the price of food products, up from 10.48 percent to 10.73 percent, providing further evidence that the weaker headline WPI inflation number was mainly driven by perishable food items. Changes in inflation rates for other manufactured products were mixed but in many cases quite small, suggesting that cash shortages have so far not produced a broad-based reduction of price pressures. This could support the assessment tentatively suggested by officials at the Reserve Bank of India that the impact of the government's currency withdrawal may be relatively short-lived.

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.