Inflation, a major concern for policymakers in India, fell to a three-year low of 6.87 percent in July from June's 7.25 percent, the government announced.
Inflation, as determined by the wholesale price index, was 9.3 percent in July 2011.
The inflation report raised hopes for interest rate cuts by the country's central bank, the Times of India quoted economists as saying. India's high food price inflation, insufficient monsoon at home and rising global crude oil prices could also affect any decision on interest rates.
The Indian economy has been hit by a number of factors -- including stubbornly high inflation, weak demand and high interest rates -- even as the coalition government faces tough challenges ahead. Food price inflation remains in double digit numbers.
Moody's Analytics last week lowered India's economic growth forecast to 5.5 percent this year from its earlier forecast of more than 6 percent, blaming policymakers as well the uncertain global conditions and deficient monsoon rainfall in India. The government has said all steps needed for India to return to a high growth trajectory were being taken.
The Times of India said hopes for lower interest rates have risen, with the latest numbers showing a sharp decline in industrial output. The output contracted 1.8 percent in June, the third such contraction in four months, compared to a growth of 9.5 percent in June of last year.