1) on the basis of wife complaint if charge sheet is filed by the police then trial will go on. Your wife have to give your evidence in the court. If charge sheet is not yet filed then wife can give a restatement to the police that she does not want to continue the case and want to withdraw the complaint. Even she can say at the time of investigation by the police . On the basis of your wife statment police will file B report i.e., false report.
2) wife has with drawn her allegations made in complaint. if you file defamation case it may take some years for final decision depending upon pendency of court cases in your area and you will incur legal expenses .