India's wholesale price inflation dropped to a five year low of 1.77% in October over continuing decline in food prices, including vegetables.
The Wholesale Price Index (WPI) based inflation was at 2.38% in September and 7.24% in October 2013.
As per data released by the government on Friday, the food inflation fell to a nearly two-and-half year low of 2.7%.
Food inflation is on decline since May. The sharp drop in WPI inflation, which fell for the fifth month in a row, came at the back of retail inflation declining to a record low of 5.52% in October.
The rate of price rise in onion contracted 59.77% as compared to a contraction of 58.12% in September.
In case of vegetables, the contraction was 19.61%, while in protein rich items of egg, meat and fish it was 2.58% in October.
During the month, inflation in potato stood at 82.11%, against 90.23% in the previous month.
Inflation in manufactured products, like sugar, edible oils, beverages and cement, fell to 2.43% in October as against 2.84% in the previous month.
The August WPI inflation was revised higher to 3.85% from 3.74% earlier, the data said. Inflation in the fuel and power segment which include LPG, petrol and diesel declined to 0.43 % as compared to price rise of 1.33% in September.
The Reserve Bank which maintained status quo in interest rate since January, will come out with the monetary policy review on December 2. The RBI factors in retail inflation while formulating its monetary policy.
Slowing inflation builds case for RBI rate cut
The decline in both retail and WPI inflation for October, coupled with improvement in industrial output for September, will put pressure on the RBI to lower interest rates to boost growth.
An uptick in manufacturing and capital goods pushed industrial output to a three-month high of 2.5% in September. Industry has been demanding easing of interest rates to boost growth, which has slumped to 4.7% in 2013-14.
The economy is estimated to grow in the range of 5.4-5.9% this fiscal.
Friday's data comes days after consumer price inflation had dropped to 5.52 percent in October, below the Reserve Bank of India's (RBI) 6 percent target for January 2016.
"With inflation at or under 6 percent we think RBI is likely to face pressure to ease, not just from the government, but also from RBI's own policy committee," said Devika Mehndiratta, a senior economist at Australia and New Zealand Banking Group Ltd in Singapore.
She expects retail inflation to hit a low of close to 4 percent in November, opening up an opportunity for a 25 basis points interest rate cut in the second quarter of 2015.
Indian businesses have been pleading for a cut in interest rates, which are among the highest in Asia, to stimulate consumption in a domestic demand-driven economy.
Consumer goods output - a proxy for consumer demand that drives 60 percent of India's economy - has grown in just two of the last 21 months. It fell an annual 4.0 percent in September.
The RBI is meeting on Dec. 2 to review policy, having kept its key repo rate steady at 8.0 percent since January.
A Reuters poll last month had shown that economists expected rates to be held unchanged until well into next year, due to worries that price pressures would revive once a favourable base effect fades out and food prices rise after a poor summer rains.
Bond traders are betting on one of the biggest interest rate reductions among major emerging markets once the rate cutting cycle begins.
The 10-year benchmark bond yield had dropped 36 basis points since Oct. 1 until the last session on hopes of a rate cut.