WPI
Also written Wholesale Price Index
Wholesale Price Index — one of the two ways the workbook says inflation is measured, tracking a basket of goods at wholesale prices, as against CPI at the retail level.
In plain language
How it works
The workbook gives no base year, weightage or numeric threshold for WPI itself. It introduces WPI only as one of two ways inflation is measured, the other being the Consumer Price Index (CPI), which prices the same idea using retail prices instead.
What the workbook does explain is the mechanism common to both. Economists define a basket of products based on general consumption in the economy, then track how that basket's price changes over time, at wholesale prices for WPI and at retail prices for CPI. Tracking WPI and CPI over several years gives policymakers and the central bank a trend they use to set fiscal and monetary policy.
A worked example
Illustrative — the workbook gives no worked WPI computation. Suppose a wholesale basket of industrial inputs and food grains cost Rs 100 in a base period and now costs Rs 106. WPI-based inflation for the period works out to 6%. If the same period's retail basket, priced through CPI, shows an 8% rise, the two measures tell a policymaker two different things at once: wholesale costs rose more slowly than what consumers actually paid, a gap the RBI would read as retailers absorbing less of the cost increase than usual.
Why NISM asks about it
Chapter 5, section 5.3.3 (Inflation (Consumer/Wholesale Price Indices) and Interest Rate), introduces WPI and CPI as a pair. Expect a question testing which index measures which level of prices, wholesale versus retail, rather than a computation.
Common exam traps
- WPI is wholesale; CPI is retail. The two are frequently swapped in answer options, and the workbook gives no numeric example distinguishing them, so the definitional pairing itself is what gets tested.
- Do not import a base year, weightage scheme or current inflation reading from outside the workbook. None of that is in this paper's text, and the exam is set from the workbook alone.
Check yourself
1.Inflation measured at the wholesale level and at the retail level is captured respectively by:
- a)CPI and WPI
- b)WPI and CPI
- c)CPI and GDP deflator
- d)WPI and PPI
Show the answer
Answer: (b) WPI and CPI
The workbook: "generally, inflation is measured in two ways — at wholesale level in terms of Wholesale Price Index (WPI) and retail level in terms of Consumer Price Index (CPI)."
Option A simply reverses them, which is the single most common error on this topic — remember that C in CPI stands for Consumer, and the consumer buys at retail.
The GDP deflator is not discussed in this chapter at all, and PPI (producer price index) is not a term the workbook uses.
2.Which inflation index is used for Inflation Indexed Bonds, and which for the Inflation-Indexed National Saving Securities-Cumulative 2013?
- a)CPI for both
- b)WPI for IIBs and CPI for the IINSS-C
- c)CPI for IIBs and WPI for the IINSS-C
- d)WPI for both
Show the answer
Answer: (b) WPI for IIBs and CPI for the IINSS-C
For IIBs: the Wholesale Price Index (WPI) is the inflation measure that is considered for the calculation of the index ratio for these bonds.
For the retail instrument: the bond carries a fixed interest of 1.5% and an inflation rate calculated on the basis of the Consumer Price Index (CPI).
The two using different indices is exactly the kind of detail a 25%-negative-marking paper builds a question on.
How the IIB adjustment works: these bonds have a fixed real coupon rate which is applied to the inflation adjusted principal on each interest payment date. On maturity, the higher of the face value or inflation adjusted principal is paid out to the investors. The inflation adjustment to the principal is done by multiplying it with the index ratio, which is calculated by dividing the reference index on the settlement date by the reference index on the date of issue.
The IINSS-C features: these bonds of 10-year tenor were available to retail resident individuals, minors, HUFs, and charities among others. The interest is compounded every six months and cumulated and the same is payable with the principal on maturity. The fixed rate of interest is the floor and is payable even if there is deflation.
Why such bonds exist at all: debt instruments, being fixed income products, run the risk of delivering negative real returns during high inflation periods.
Where this is taught
Free preparation for NISM Series XVRelated terms
- InflationA sustained general rise in the price level, which erodes what a rupee buys — and the reason a nominal return has to be deflated before it means anything.
- Monetary policyThe central bank's management of money supply and interest rates to promote growth and hold prices stable — expansionary when it wants to push the economy up, contractionary when it wants to cool it.