India inflation falls to 3-year low

India's inflation rate unexpectedly retreated to a more than three-year low last month, data showed on Thursday, opening the door to more interest rates to revive a sharply slowing economy.

The figures stood out as good news in an otherwise gloomy string of recent data for the Congress-led government, which has been pressing hard for the central bank to cut rates to kickstart the economy ahead of 2014 elections.

The widely watched Wholesale Price Index fell to 6.62 percent in January from a year earlier -- its best level in 38 months -- eclipsing market expectations that it would slow to just below seven percent.

"January inflation has retreated substantially," said Jyoti Narasimhan, economist at research house IHS Global Insight, and forecast a quarter point interest rate cut in March.

The January reading marked the first time inflation in Asia's third-largest economy has fallen below seven percent since November (Xetra: A0Z24E - news) 2009.

The data follow figures earlier this week showing industrial production shrank unexpectedly in December for a second straight month and that India's trade gap climbed to a hefty $20 billion in January.

Last month, the central bank cut its benchmark lending rate for the first time in nine months by a quarter point to 7.75 percent to help pull the economy out of its worst slump in a decade and signal support to government policy changes aimed at boosting investment.

Narasimhan said she expected the bank to keep easing "in small increments".

But she said she did not expect "aggressive" rate cuts with the bank worried about boosting India's record current account deficit -- the widest measure of trade -- by stoking consumer import demand through lower borrowing costs.

Official forecasts for economic growth this financial year to March 2013 range from five to 5.5 percent -- in either case the weakest pace in a decade.