India's wholesale price index fell 0.52 percent on the year in August, after falling 1.36 percent in July. This is the fifth consecutive month of deflation in producer prices. Consumer price data for August published earlier in the week showed a fall in headline inflation from 7.44 percent in July to 6.83 percent in August, above the Reserve Bank of India's target range of 2.0 percent to 6.0 percent for the second consecutive month. The index rose 0.26 percent on the month after surging 2.15 percent previously.

The smaller year-over-year decline in wholesale prices in June was mainly driven by food prices, which account for around 15 percent of the index. These rose 5.62 percent on the year, moderating from a previous increase of 7.75 percent. Manufacturing prices, which account for around 64 percent of the index, fell 2.37 percent on the year after a previous decline of 2.51 percent, while fuel prices, around 13 percent of the index, fell 6.03 percent after dropping 12.79 percent previously.

The year-over-year drop in Indian wholesale prices is forecast to shrink to 0.50 percent in August from 1.36 percent in July.

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.