India's wholesale price index fell 0.26 percent on the year in September, after falling 0.52 percent in August. This is the sixth consecutive month of deflation in producer prices. Consumer price data for September published last week showed a fall in headline inflation from 6.83 percent in August to 5.02 percent in September, back within the Reserve Bank of India's target range of 2.0 percent to 6.0 percent after a spike in food prices had pushed it above that range in the two previous months. The index fell 0.66 percent on the month after advancing 0.26 percent previously.

The smaller year-over-year decline in wholesale prices in September was driven by smaller declines in manufacturing and fuel prices. Manufacturing prices, which account for around 64 percent of the index, fell 1.34 percent on the year after a previous decline of 2.37 percent, while fuel prices, around 13 percent of the index, fell 3.34 percent after dropping 6.03 percent previously. Food prices, which account for around 15 percent of the index, rose 1.54 percent on the year, slowing sharply from a previous increase of 5.62 percent.

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.