India's wholesale price index rose 2.04 percent on the year in July after increasing 3.36 percent in June. Consumer price data published earlier in the week also showed a fall in headline inflation from 5.08 percent in June to 3.54 percent in July, below the mid-point of the Reserve Bank of India's target range of two percent to six percent.

The smaller year-over-year increase in wholesale prices in July was driven by food prices, which account for around 15 percent of the index. These rose 3.55 percent on the year after increasing 8.68 percent previously. Manufacturing prices, around 64 percent of the index, rose 1.58 percent on the year after a previous increase of 1.43 percent, while fuel prices, around 13 percent of the index, rose 1.72 percent on the year, up from the previous increase of 1.03 percent.

The year-over-year increase in Indian wholesale prices is also seen easing to 2.05 percent after rising to 3.36 percent in June from 2.61 percent in May.

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.