Inflation has fallen

In India, inflation has two popular measures:

  1. CPI (consumer price index)
  2. WPI (wholesale price index)

The CPI measures prices at the retail consumer level. The WPI measures prices at the wholesaler level. In regards to fuel, the WPI is more sensitive to fuel prices. It assigns a weight of 14.91% to fuel—compared to 9.49% assigned to fuel by the CPI.

India’s inflation reacted to the fall in crude prices

Looking at the trend this year, both measures of inflation have slowed their pace. The WPI came to a halt. It was impacted by the falling crude oil prices. The sharpest decline in prices came in the last four months—the same period when crude prices fell.

The Crude Petroleum Index is used as an input to calculate the WPI. It has been declining since August. Its sharpest decline was seen in November—the index slumped 16.6%.

A fall in fuel prices also impacts food prices as transportation costs come down. Food articles account for 14.3% of the WPI and 39.7% of the CPI. As a result, the impact of falling crude prices is magnified.

Impact

Since inflation’s high pace has been plaguing India for the last five years, this fall is a welcome change. It eases pressure on the RBI (Reserve Bank of India). It will help the RBI reduce India’s key rate—the repo rate. Currently, it’s 8%. A reduction in this rate would make loans cheaper. It would be an incentive for people to spend. This would help increase India’s economic growth.

It would help India-focused ETFs—like the WisdomTree India Earnings Fund (EPI) and the PowerShares India Portfolio (PIN). ETFs with over 5% exposure to India—like the Vanguard FTSE Emerging Markets ETF (VWO), the iShares MSCI Emerging Markets Index Fund (EEM), and the iShares Core MSCI Emerging Markets ETF (IEMG)—should also benefit from a rising Indian economy.

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