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Inflation had risen for two consecutive weeks, arresting its steep decline as a strike by truck drivers pushed up prices.
But analysts said this had been an aberration and some added India could be in for a period of deflation by May as Asia's third-largest economy slows sharply from over 9 per cent levels in the past few years.
"Given the current trend, inflation, could settle well below 2 per cent by end-March," said Shubhada Rao, chief economist at Yes Bank in Mumbai.
"In so far as monetary action is concerned, we have penciled a 50-basis-point cut in the repo and reverse repo rates before March."
The wholesale price index, the most widely watched inflation measure, rose 5.07 per cent in the 12 months to Jan. 24, lower than the previous week's 5.64 per cent and below a forecast of 5.21 per cent in a Reuters poll.
It was the lowest reading since Feb. 9 when inflation stood at 4.98 per cent.
The Reserve Bank of India left its key interest rates steady last week, saying banks still had to pass on the benefits of previous cuts. Its main lending rate, the repo, stands at 5.5 per cent and its reverse repo rate, at which it absorbs surplus cash from the system, is at 4.0 per cent.
Economists and policy advisers have told Reuters in recent days they expect the RBI to cut rates after the government presents its temporary or interim budget on Feb. 16 ahead of general elections due by May.
The partially convertible rupee was steady at 48.80/81 per dollar after the latest inflation data, little changed from Wednesday's close of 48.82/93. Bond trading was interrupted by a breakdown in the trading platform.
The RBI said last week it expects the economy to grow at a six-year low of 7 per cent or less in 2008/09 as the global economic slowdown and expensive credit at home trips up activity.
While that pace of expansion would be the envy of much of the world, India needs more rapid growth if it is to reduce widespread poverty among a billion-plus people and create much needed jobs.
Recent data have provided little relief.
Exports, which account for nearly 20 per cent of India's gross domestic product, are expected to plummet by more than a fifth in January as the global slowdown slashes demand.
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If inflation is just 5% , why is it that all prices are on a steep rise, particularly those ones which affect the middle class?
All these statistics are manipulated like stock-market and GDP.This and all that sounds good are election stunts.We will be hearing lot junk like this in coming months.The facts will remain the same the poor and middle class be suffering more under this treacherous bunch of power-hungry politicians.The leaders are pretentious and their policies are delusive and insidious to the society and Nation.
Give us a break, hatred towards a particular government cannot be the basis of your analysis. Inflation in Gujarat too would be 5% but there you won't contest their claims on Growth.
No hate for this Govt but certainly dislike for failed/wasted five years of the whole Nation.Is it not true that this Govt has done nothing to the expectations of the people and the promises it made?I am not refering to one particular state now that you have mentioned Gujrat,well there too its not all clean.There too its muddy but not to that extant the way its going on in rest of the country.Thanks to Modi and his adminstration(I'm not Modi's fan).There too the recent figure given,of foreign investments,were exaggerated.Naturally I would love to see inflation down to Zero but the way it comes in news leaves lot doubts.Just reducing Patrol;diesel and Gas prices the inflation can't come down to 5% from around 15% that too in such a short time.Most people on the earth forget the things soon and some little later and the cunning politicians know and they play such silly tricks to show as if they were doing something.If you have some extra time on hand go and contact the people and see their plight.