Food inflation fell to single digits -9.52%- for the first time in three-months on the back of cheaper of potatoes and pulses, a relief for policy makers looking for ways to cool prices without upsetting the growth momentum.
All eyes will now be on the Reserve Bank of India (RBI) that will announce its mid-quarter review of the monetary policy next week.
The RBI has raised key policy rates seven times so far in 2010-11 to cool prices as the food prices raced into high-double digits pummelled by a supply crunch of staple vegetables.
This could hurt growth and companies may defer planned investments.
India's industrial production growth fell to 1.6% in December, the slowest in 20 months from 3.6% in the previous month adding another set of worries to the government's macro economic managers who are grappling for options to sustain growth and keep prices under check.
In January, the RBI maintained the repo and reverse repo rates at 6.5 % and 5.5 % respectively.
A higher repo, the rate at which RBI lends to lenders, raises the banks' borrowing costs prompting them to raise interest rates for final home, auto and corporate borrowers.
A higher reverse repo-the rate at which RBI absorbs excess cash -means it would suck cash from the system to stymie demand and cool prices.
"The policy challenge of maintaining the growth momentum in the economy with price stability is going to remain a key focus area for monetary policy and macro-economic management," the Economic Survey for 2010-11 tabled last month said.