India's annual rate of inflation, based on the wholesale price index, fell to a near-five-year low of 3.74 percent for August, raising expectations of a rate cut when at Reserve Bank's scheduled policy meet on Sep 30.
According to data released by the commerce and industry ministry Monday, the annual inflation rate stood at 5.19 percent for the previous month and 6.99 percent for August of 2013.
Notably, the annual inflation rate for food articles in August fell to 5.15 percent from 19.17 percent in the like month of the previous year.
The decline was the sharpest for onions -- from 272.54 percent in August of last year to (-)44.70 percent. The fall was also quite sharp, for vegetables -- from 80.96 percent in to (-)4.88 percent.
The wholesale price index numbers also suggested a drop in the inflation rate for eggs, meat and fish from 20.15 percent to (-)5.87 percent. While for rice the drop was from 21.33 percent to 5.44 percent, for wheat it was 9.38 percent to 0.67 percent.
Manufactured products, however, showed an increase from 2.31 percent to 3.45 percent.
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Fuel prices also fell sharply with the rates of the Indian basket of crude oil falling almost $3 a barrel in a week after international prices dropped last month below the psychological barrier of $100. Petrol rates were cut thrice in August, helping bring down fuel inflation to 4.54 percent in August against 7.40 percent in July.
After the third rate cut last month on Aug 31, petrol sells at Rs.68.51 a litre in Delhi, Rs.76.41 in Mumbai, Rs.76.14 in Kolkata and Rs.71.55 in Chennai.
What is fuelling expectations of further rapid petrol rate cuts is that the country is on the doorsteps of market pricing of diesel since under-recoveries, or losses, incurred by state-run oil marketers like Indian Oil on selling the fuel below cost, have almost been wiped out by the monthly diesel hikes.
Diesel prices are being raised monthly by 50 paise a litre in line with the government's January 2013 decision, and this month is expected to be the last of the regulation era.
Expectations of a rate cut by the RBI due to inflation cooling are, however, tempered by the fact that it uses the consumer price inflation to set interest rates.
India's retail inflation slowed down to 7.8 percent in August from 7.96 percent in the previous month.
Reserve Bank Governor Raghuram Rajan, known for giving primacy to inflation control, has said he wants CPI to slow to 8 percent by January, and then to 6 percent within 12 months.
Meanwhile, Rajan Monday said the country required investment to boost growth.
"Recovery is still uneven. We need investment to pick up," Rajan told a bankers conference in Mumbai.
While inflation abated mildly in August, data released Friday showed industrial output was flat in July.
Industrial activity, measured in terms of the Index of Industrial Production (IIP), grew 0.5 percent in the month of July over the same month of the previous year.
Commenting on the wholesale price numbers, the Confederation of Indian Industry said: "CII welcomes the precipitous decline in inflation to a five year low on the back of a sharp drop in food and fuel prices," said Chandrajit Banerjee, director general, CII, in a statement.
"Prices of manufacturing products have also moderated indicating that core inflation is within range. Coming shortly before the monetary policy, this should also provide the necessary maneuvering space to the RBI," he added.