Inflation turned negative 1.61 for the first time in 30 years but the prices of food items like fruit and vegetables, cereals and oil were still higher than last year.
With the wholesale price index shrinking to 232.7 points for the week ended June 6 from 236.5 in the same week a year ago, India possibly is the only major economy moving into a deflationary zone though the European region is near zero level due to recessionary pressures.
The stock markets immediately welcomed the development and jumped by about 200 points from the morning lows as market analysts expect this to help further ease the monetary policy restrictions and pave the way for cut in banks' lending rates.
Releasing the wholesale price data, the government said 'the annual rate of inflation, calculated on a point to point to basis stood at minus 1.61 per cent for the week ended June 6 as compared to 0.13 per cent for the previous week and 11.66 per cent during the corresponding week of previous year'.
However, food articles were costlier by 8.7 per cent from the comparable week last year as pulses moved up 17 per cent, cereals 13.5 per cent, and fruit and vegetables 10 per cent.
The dip was on account of a fall in fuel prices as international crude oil is now ruling around $70 a barrel against over $140 a barrel during the year-ago period.
As a result, the fuel index slipped by 13 per cent compared to the corresponding week a year ago.
However, furnace oil and naphtha turned expensive by 7 per cent each and diesel oil was dearer by 4 per cent.
Among food articles, items like fruit and vegetables declined by 7 per cent, fish-marine by 2 per cent and gram and groundnut seeds by 1 per cent each.
At the same time, groundnut oil and imported edible oil turned cheaper by one per cent.
Nonetheless, prices of arhar surged 7 per cent; jowar and eggs 3 per cent each; masur and maize 2 per cent each; while moong, mutton and spices turned expensive by one per cent each during the week.
Salt prices surged by a whopping 10 per cent during the week while sugar was dearer by one per cent.
Inflation fell to sub-zero level despite rising food prices, which analysts feel is not good for the economy.
"It is not very positive for the economy, particularly the manufacturing sector . . . inflation dipped to below zero level in 1975, the emergency days," said ICRIER consultant Mathew Joseph.
He further said that as the RBI cannot do much about falling inflation, 'the government in the Budget should push reforms to restore the confidence of industries and initiate steps to generate overall demand".
Crisil principal economist D K Joshi opined that inflation falling below zero was imminent. It was merely postponed due to rising food prices. Negative inflation is due to low demand and high base effect.
The index is likely to remain in the sub-zero level for 2-3 months, unless there is spike in the prices of oil and commodities, he said.
As per the annual monetary policy for 2009-10 released by RBI, inflation was expected to come into negative territory by the early part of 2009-10 but it would be a statistical significance and it would move to 4 per cent by March 2010.
Analysts believe that inflation at sub-zero level makes case of softening of the interest rates.
RBI may reduce its lending and borrowing rates by 25 basis points in its July policy. From December, there might be reversal of policy by the central bank, HDFC Bank economist Jyotinder Kaur said.
Among manufactured products, prices of tractor tyres were up by 8 per cent, motor tyres and lead ingots by 4 per cent each during the week. However, steel ingots were cheaper by 7 per cent and steel sheets, plates & strips and zinc ingots fell by 1 per cent each on weekly basis.
Inflation for the week ended April 11 was revised upwards to 0.96 per cent from 0.26 per cent, as estimated provisionally.