Analysts in a Reuters poll had predicted inflation to have hit an 11-month high of 7.96% in October after it scaled a ten-month peak of 7.81% in September. Inflation had touched 9.87% in October last year.
The drop in inflation would exert renewed pressure on the Reserve Bank Of India (RBI) to take steps to complement the government’s recent push for growth, especially after Monday’s data revealed industrial production contracted by 0.4% in September and grew by merely 0.1% during the April-September period.
Last month, the central bank defied the finance ministry’s expectations of a rate cut to trim firms’ borrowing costs, but RBI governor D Subbarao hinted at some sort of explicit policy guidance, saying the central bank might ease policy in the final quarter of this fiscal when it expects inflation to ease somewhat.
Although economists say the drop in inflation came as a pleasant surprise, mainly due to a decline in food inflation, they believe the RBI may still adopt a wait-and-watch approach to see if the fall is just a one-off or a trend before it decides on easing rates.
"Even at 7.45%, the inflation is still above the comfort zone (of the central bank) and RBI would want to see a sustained drop in this inflation trend,” said Shubhada Rao, chief economist at Yes Bank.
"Clearly, a lot of these pressures are still evidently supply-side driven. So the fiscal consolidation has to be more meaningful to allow a more sustainable downtrend in inflation trajectory."
Prime Minister's Economic Advisory Council chairman C Rangarajan last month said he expected inflation to drop to 7% by the end of this fiscal.
The latest data showed manufactured items, which have a 65% weightage in the inflation basket, went up 5.95% in October, compared with 6.26% in the previous month.
Chemicals and chemical products price index inched up 6.58% in October, compared with 7.47% in the previous month. Similarly, basic metal alloys and metal products prices went up 6.45% last month from 7.46% in September. However, manufactured food item inflation inched up to 9.82% from 9.76% a month before, thanks to an 18.71% rise in sugar rates.
Fuel and power inflation slowed to 11.71% in October from 11.88% in the previous month.
Inflation in food articles dropped to 6.62% in October from 7.86% the previous month, thanks a drop in prices of some vegetables . However, a 49.13% rise in prices of potato, 20% in pulses, 19.78% in wheat, 14.35% in cereals and 13.28% in egg, meat and fish prevented a sharper slowdown in the pace of food inflation.