India's wholesale price index rose 4.73 percent on the year in January, slowing from 4.95 percent in December. 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 manufacturing prices, which account for around 64 percent of the index. These rose 2.99 percent on the year after increasing 3.37 percent previously. Fuel prices, which account for around 13 percent of the index, rose 15.15 percent on the year, moderating from a previous increase of 18.09 percent, whereas the year-over-year increase in food prices, around 15 percent of the index, picked up from a decline of 1.25 percent to an increase of 2.38 percent.

Consumer price data published earlier in the week showed headline inflation rose from 5.72 percent to 6.52 percent, moving back above the top of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent. This increase in CPI inflation will likely reinforce the chances of further policy tightening by the RBI in coming months.

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.