The wholesale price index (WPI), the main inflation indicator, rose an annual 6.84 per cent in February, higher than the 6.6 per cent rise estimated by analysts. Wholesale prices rose 6.62 per cent in January.
"The fall in manufacturing inflation is quite comforting," C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council and a former RBI governor, told NDTV Profit, adding that the RBI now has more room to ease monetary policy with core inflation falling below 4 per cent.
Core inflation, which excludes volatile food and fuel prices, has been easing since September 2012 and the trend continued last month, helped by a favourable statistical base from a year ago.
"Despite the February uptick, the medium-term trend is for cooler Indian inflation," Glenn Levine, senior economist at Moody's Analytics, said in a note. "Core inflation is trending steadily downwards due to the economy's sizeable negative output gap and it is only elevated food inflation and rising fuel prices preventing a sharper drop in the headline. We expect these trends to continue in the coming months as the WPI inflation heads towards 6 per cent through the second half of 2013."
The BSE Sensex and Nifty benchmarks rose 0.5 per cent on Thursday as core inflation fell below 4 per cent.
The central bank estimates the threshold level for inflation at 4-6 per cent, and levels above that demand monetary policy tightening, RBI Governor Duvvuri Subbarao said on Wednesday.
Inflation must come down to a 4 to 6 per cent range, Mr Subbarao told students in London, adding that full implementation of this year's Budget will have a "softening impact" on price growth.
"The Reserve Bank has to ensure that inflation is brought down to the threshold level and is maintained there," he added.
"Though the headline number is still high, the break-up (detail) shows that inflation will continue to ease going ahead and along with the government's fiscal consolidation efforts, there is even more reason to expect the RBI to cut rates in March and for some more time going ahead," Rahul Bajoria, regional economist at Barclays Capital, told Reuters.
Already, India's retail inflation is the highest among the BRICS group of emerging economies - Brazil, Russia, China, and South Africa. It accelerated to 10.91 per cent in February from the previous month, government data showed on Tuesday. However, the RBI gives more weight to the wholesale price index data in setting policy.
Mr Subbarao, arguably the world's most hawkish central banker, has repeatedly rebuffed government calls for lower interest rates to kickstart growth which is at a decade-low, calling on the government to do its bit via fiscal consolidation.
He said last week that India did not have the fiscal capacity to continue welfare programmes at current levels.
Finance Minister P Chidambaram unveiled a 16 per cent surge in spending in the 2013-2014 Budget, ahead of 2014 elections, but imposed taxes on the rich and large firms to fill the revenue gap and cut the deficit. But most analysts consider his revenue assumptions too optimistic.
"(India's) long-term growth drivers are intact but I also want to say the India growth story is not inevitable. If we don't do the right things, we will squander an historic opportunity," the RBI Governor said.
With inputs from Reuters