Annual food inflation eased for a ninth straight week to its lowest in nearly six years in mid-December on improved supplies, bolstering hopes of a cooling in overall inflation that will allow the RBI to shift focus to reviving growth by cutting rates.
Food price index rose 0.42 percent in the week to December 17 from a year ago, its slowest rise at least since April 2006, as prices of vegetables, potatoes and onions fell by up to 11 percent on new crop arrivals in markets.
Annual fuel inflation eased to 14.37 percent in the latest week from 15.24 percent a week earlier, government data on Thursday showed.
Moderating food prices should cool overall inflation. We expect headline inflation below 8 percent in December, said Aditi Nayar, an economist with ICRA.
It will allow the Reserve Bank of India to be on pause for a few months, before it starts cutting rates in April-June quarter next year.
India's headline inflation was 9.11 percent in November, staying stubbornly above 9 percent for a year mainly driven by high food prices.
The RBI, which has raised its interest rates 13 times since March 2010 to tame sticky inflation, expects the headline inflation to ease to 7 percent by March.
With risks to economic growth mounting, pressure is building on the RBI to reverse its tight monetary stance.
The RBI left its rates steady at its last review early this month and sent a strong signal that its next move was likely to be an easing of monetary policy.
Analysts widely expect the RBI to cut rates by 25 basis points by mid-2012, a Reuters poll found early this month.