Inflation declined to 0.48 per cent for the week ended May 23, giving head room to the government to initiate expansionary measures and prompt banks to cut rates.
While the wholesale price index stood at 0.61 per cent in the previous week, the rate of price rise was 8.90 per cent during the corresponding week a year ago.
Even though inflation declined during the week, the prices of essential food items like fruit, tea, cereals, pulses and spices became more expensive.
In the light of falling inflation, finance minister Pranab Mukherjee is holding a meeting with heads of public sector banks on June 10 to stress further moderation in interest rates to spur economic growth.
"My government is firmly committed to maintaining high growth with low inflation, particularly in relation to prices of essential agricultural and industrial commodities," President Pratibha Patil said while presenting the agenda of the second United Progressive Alliance government at the joint session of Parliament.
This is the 12th week in succession when inflation stood below one per cent.
Meanwhile, ICICI Bank today slashed the benchmark lending rate by 50 basis points to 15.75 per cent, a move that would benefit home, consumer corporate loan borrowers.
ICICI Bank has also reduced the floating reference rate applicable to floating rate retail loans, including floating rate home loans by 50 basis points from June 5.
According to HDFC Bank economist Jyotinder Kaur, the RBI might reduce the repo and reverse repo rates by 25 basis points in its July policy.
From December, there might be reversal of policy by the central bank, she said.
During the week, the prices of tea went up by 5 per cent while eggs, maize, arhar and spices were dearer by one per cent each.
However, the prices of ragi and barley declined by one per cent each and salt by about 4 per cent.
Among manufactured items, the prices of footwear got cheaper by one per cent, moulded plastic items by four per cent and cycle tubes by two per cent. Even airconditioners prices declined by as much as 9 per cent.
Year-on-year, the prices of cereals went up more than 12.5 per cent, pulses 15.3 per cent, and fruit and vegetables 7.3 per cent. At the same time, the prices of milk have gone up nearly 6.4 per cent over last year, while spices were more expensive, by about 8.4 per cent.
Among manufactured food products, processed fish turned dearer by more than 42.7 per cent over last year.
Inflation for the week ended March 28 was revised upwards to 0.84 per cent from 0.26 per cent, as estimated provisionally.