The headline inflation rate moderated to its lowest level in more than three years in January 2013, helped by a slower rise in fuel and manufactured goods prices, which could give policymakers more leeway to revive a slowing economy.
Wholesale prices rose 6.62 per cent, beating estimates of 7 per cent, in January from a year earlier and a tad slower than December's three-year low of 7.18 per cent.
"The annual rate of inflation, based on the monthly wholesale price index (WPI), stood at 6.62 per cent (provisional) for the month of January 2013 (over January 2012) as compared to 7.18 per cent (provisional) for the previous month and 7.23 per cent in the year-ago period," a government release said.
Fuel prices rose 7.06 per cent in January from a year earlier, compared with an annual rise of 9.38 per cent in December.
Manufacturing goods inflation dropped to 4.81 per cent from 5.04 per cent in January. Non-food manufactured inflation - a barometer for demand-driven price pressures - eased to 4.1 per cent during the month from 4.2 per cent in December.
C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, said the January number was "a welcome sign", and forecast inflation would drop to 6.5 per cent by March, with core inflation stabilising below 4 per cent. (Read: Lower inflation gives RBI more room to cut rates, experts say)
Still, the headline rate remains well above the Reserve Bank of India's perceived comfort zone of around 5 per cent for a while, giving the central bank little room to ease monetary policy aggressively.
Asia's third-largest economy has been hamstrung by weak capital investment and flagging consumer demand. A series of government policy U-turns and a slowdown in the rate of implementing key industrial and infrastructure projects have added to investor gloom.
Worried about the deepening economic slump and encouraged by a slowing trend in inflation, the RBI last month cut interest rates for the first time in nine months. But it warned that the room for further monetary easing was limited unless inflation and a high current account deficit improved by more than expected.
India's current account deficit hit an all-time high of 5.4 per cent of gross domestic product in the July-September quarter and is widely expected to widen further in the subsequent quarter on falling merchandise exports.
Industrial production unexpectedly shrank for a second straight month in December, casting doubt on the government's view that the economy is showing signs of recovery. Output has grown in just three of the last nine months.
Slowing economic activity is also constraining resources for the government's flagship welfare programmes. It has also made it tougher for Finance Minister P. Chidambaram to trim a swollen fiscal deficit that has put the country in danger of losing its investment grade credit rating.
With very little resources at its disposal to cut the fiscal deficit -- among the widest in major emerging economies -- the government is resorting to deep spending cuts, which are further clouding near-term growth prospects.
Mr Chidambaram can ill afford to offer any expensive pump-priming measures in the Budget, which will be tabled in Parliament on February 28.