India's wholesale price index rose 4.95 percent on the year in December, slowing from 5.85 percent in November. WPI inflation has been trending lower since mid-2022 and is now at its lowest level since February 2021.

This decline in headline WPI inflation was largely driven by food prices, which account for around 15 percent of the index. These fell 1.25 percent on the year after increasing 1.07 percent previously. Manufacturing prices, which account for around 64 percent of the index, rose 3.37 percent on the year, moderating from a previous increase of 3.59 percent, whereas the year-over-year increase in fuel prices, around 13 percent of the index, picked up from 17.35 percent to 18.09 percent.

Consumer price data published last week showed headline inflation moderated from 5.88 percent to 5.72 percent, still well above the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent but down from the recent peak of 7.41 percent in September. CPI and WPI inflation data for December may indicate that RBI policy tightening in recent months is helping to curb price pressures.

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.