Consumer inflation in March cooled to a three-month low of 5.17 per cent, compared to 5.37 per cent in February, government data showed on Monday.
The data beat expectations as a Reuters poll of economists had forecast consumer prices to rise to 5.5 per cent in March.
Food inflation eased to 6.14 per cent last month compared with February's upwardly revised 6.88 per cent, helping the overall consumer inflation decline in March.
The March inflation data shows that it remains below the RBI's year-end target of 6 per cent.
Analysts say that there is a possibility of a rate cut by the RBI in June. The central banks' second bi-monthly monetary policy statement will be announced on June 2.
Vinod Nair, head of fundamental research at Geojit BNP Paribas Financial Services, says the slide in March inflation number opens up the possibility of a 0.25 per cent cut in RBI repo rate.
He also expects Indian stock markets to react positively on Wednesday to this March inflation data. Indian stock markets are closed on Tuesday.
The RBI could even surprise with a rate cut before June, Mr Nair added, depending on the transmission of its earlier 0.50 per cent cut in repo rate. Though the central bank bank cut its repo rate by a combined 0.50 per cent in January and March earlier this year, banks have so far just reduced their base rate, or minimum lending rate, between 0.15 per cent and 0.25 per cent.
The Reserve Bank of India or RBI has cut interest rates twice this year at unscheduled meetings, but kept its key repo rate on hold at 7.50 per cent last week, waiting to assess inflationary pressures and give commercial banks more time to cut their lending rates.
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