One of the major factors that the movement of the Indian stock market is dependent on is the rate of inflation in the country. The lower the rate of inflation, the better the market performs, and vice versa. To measure the inflation in the economy, the Reserve Bank of India takes a host of different indicators and indexes into consideration. The wholesale price index is one such indicator. Wondering what it is? Continue reading to find out.
What is the Wholesale Price Index?
The wholesale price index, also known as WPI, is an indicator that is used to represent the price of a certain set of goods at the wholesale level. The WPI is arrived at by measuring the weighted average prices of the specific set of goods charged by manufacturers and wholesalers.
Many countries, including India, use the wholesale price index along with the consumer price index (CPI) to measure the rate of inflation in the economy. The higher the WPI, the higher the inflation rate is likely to be.
The wholesale price index is usually represented as a percentage change concerning the previous month or the previous year. It is usually done to give the readers a better perspective of how the prices have moved over time.
The basket of goods whose prices are considered for the calculation of the wholesale price index varies from one country to another. Large countries such as India consider hundreds of goods (697 items, to be exact) across three groups - primary articles, fuel and power, and manufactured goods.
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How Does the Wholesale Price Index Work?
Here’s a hypothetical example to help you understand how the wholesale price index in India works.
Assume that the weighted average price of the basket of goods is Rs. 128 as of April 2023. The price of the same basket of goods in the previous month of March 2023 was Rs. 125. And in the same month in the previous year, the average price was Rs. 120.
This means that the wholesale price index increased by 2.4% on a month-on-month (MOM) basis. And going on a year-on-year (YOY) basis, the WPI rose by 6.66%.
The Importance of the Wholesale Price Index
As you’ve already seen before, the wholesale price index is an indicator that plays a huge role in determining the inflation rate of the economy. If the WPI rises, inflation will also go up. On the other hand, if the WPI drops, the inflation rate will go down.
Since the wholesale price index in India takes into account as many as 697 different items across three major groups, it captures the price movement of goods comprehensively. It is for this reason that WPI is used by the government, banking institutions, industries, and corporations.
The wholesale price index is one of the many factors that majorly influence the monetary policy of the Reserve Bank of India and the fiscal policy of the Indian government. Generally, when the WPI is high, the RBI raises the repo rate to reduce the supply of money in the economy. This helps control inflation to a certain extent.
On the contrary, when the WPI is low, the RBI reduces the repo rate. This increases the supply of money and helps boost economic growth. However, the side effect of this decision is a rise in the inflation rate.
Many manufacturing companies routinely use the wholesale price index when drawing up escalation clauses in raw material supply contracts and construction contracts.
How Does the Wholesale Price Index Differ From the Consumer Price Index?
As you’ve already seen, the wholesale price index and the consumer price index are two of the primary indicators used in the calculation of inflation data. Both of these indicators convey vastly different things. The WPI is an indication of the prices of select goods at the wholesale level, whereas the CPI indicates the weighted average price of select goods and services at the retail (consumer) level.
By accounting for both the prices at the first stage of a transaction (WPI) and the last stage of a transaction (CPI), a country can effectively and accurately ascertain the rate of inflation present in its economy.
Conclusion
The wholesale price index in India for a particular month is published during the succeeding month. As an investor, you should always keep an eye on this data since it can give you an idea of the way the market is likely to react in the future. If there’s an unusually high spike in the WPI, the markets are likely to not take it lightly. Such a situation might even cause a temporary sell-off. On the other hand, if the WPI eases, the market might take it positively, in which case the stock prices may rise.