Indian inflation eases to 26-month low in Jan

"This has raised chances of a 25-basis point rate cut in March (rather) than in April. The rupee's rebound in January has also partially helped inflation to ease."

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The Reserve Bank of India is widely expected to start cutting interest rates in the quarter beginning April 1, as it looks to stimulate an economy that is headed for its slowest growth in three years. The central bank had a 20-month tightening cycle that ended in October.

Economists expect the RBI to cut its policy rate by 100 basis points from the current 8.5 percent in 2012, with a cut of 50 basis points in the April-June quarter.

India's federal bond yields and swap rates fell after the data. The benchmark 8.79 percent, 2021 bond yield fell 2 basis points to 8.18 percent.

The benchmark 5-year swap rate fell 3 basis points to 7.28 percent and the 1-year swap rate dropped 5 basis points to 8.04 percent.

WORRIES PERSIST

Annual food prices in January fell 0.52 percent from 0.74 percent rise in December, helped by improved supplies of vegetables.

However, prices of protein-rich food items such as eggs, fish and meat, milk and pulses remained high, suggesting that food inflation remains a potential problem area.

Manufacturing inflation, a barometer for demand-driven price pressures, dropped to 6.49 percent from 7.41 percent in December.

Fuel prices rose 14.21 percent from a year earlier, compared with an annual rise of 14.91 percent in December.