India's wholesale price index rose 0.73 percent on the year in December after advancing 0.26 percent in November. The year-over-year increases in the index in the last two months follow an extended run of deflation in producer prices. The index fell 0.85 percent on the month after a previous increase of 0.26 percent. Consumer price data published last week also showed stronger price pressures, with headline inflation picking up from 5.55 percent in November to 5.69 percent in December, further above the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent.

The bigger year-over-year increase in wholesale prices in December was driven by food prices and fuel prices. Food prices, which account for around 15 percent of the index, rose 5.39 percent on the year after increasing 4.69 percent previously, while fuel prices, around 13 percent of the index, fell at a less pronounced pace, down 2.41 percent after dropping 4.61 percent previously. Manufacturing prices, around 64 percent of the index, fell 0.71 percent on the year after a previous decline of 0.64 percent.

Wholesale prices are expected to increase 1.1 percent on the month in December versus a 0.53 percent rise in November.

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.