The drop in headline inflation to a 40-month low of 5.96 per cent for March has increased the possibility of a rate cut by the Reserve Bank at its May 3 annual policy, analysts and rating agencies said.
India Ratings said the cooling off in both core and general inflation readings, coupled with fiscal consolidation and reform measures undertaken by government, will help RBI Governor Duvvuri Subbarao go for a "cautious monetary easing".
Interestingly, in last policy review in March, when it had cut the repo rate by 0.25 per cent to 7.5 per cent, the apex bank had virtually ruled out a rate cut in near future, saying it had a limited room because of the high current account deficit, which had touched a historic 6.7 per cent of GDP in Q3 of last fiscal.
Citing the downward trend, Crisil said the average headline inflation for FY14 will go down to 6.3 per cent from the 7.3 per cent in FY13. "The probability of inflation surprising on the downside is high," the rating agency said.
"We expect the central bank to cut the repo rate by clips of 0.25 per cent in the next two policy meetings in May and June. We think RBI will support an easing monetary policy bias in the next few months," Deutsche Bank said.
Foreign brokerage Credit Suisse said there is a "green signal" for a rate cut in the May monetary policy announcement and also discounted the only inhibiting factor of trade data for March, which is due to be released later this week.
Credit Suisse pointed that RBI's preferred measure of core WPI inflation is also down to 3.5 per cent, the seventh consecutive drop and the lowest since February 2010.
Data released on Monday said softening vegetable prices help pull down inflation to 5.96 per cent in March from 6.84 per cent in the previous month.
However, Sonal Verma of Japanese financial firm Nomura sounded cautious, saying the downward trend is not sustainable due to the likely release of suppressed inflation on coal and electricity price hikes, a rise in food prices and an expected depreciation in the rupee in second half of the year.
"Besides weak demand, the bulk of moderation in core WPI inflation is due to lower commodity prices," she said.
Credit Suisse sounded concerned on data revisions, citing the January inflation data correction from 6.6 per cent to 7.3 per cent.