Deflation fears prompt analysts to urge for rate cuts

"The fall in the inflation rate does not carry comfort for the common man," said D.K. Joshi, principal economist at credit ratings agency CRISIL, as the year-on-year inflation rates for various items such as sugar, cereals and pulses are in double digits or near 10 percent.

"Falling inflation rates doesn't mean falling of prices, it only implies the rate at which the prices of goods are growing is low," Joshi said.

"Energy and manufacturing product prices have come down but the food prices are still rising," Joshi said. Food prices have a roughly 70 percent weight in the consumer price indices.

However, Joshi said if the CPI is considered, the real interest rate - the difference between the actual interest rate and inflation rate - has not increased that much.

"The expected inflation rate is important for calculating the real interest rate. Inflation may turn negative at 2-3 percent soon but it would be temporary. We can expect to see inflation close to zero by March-end and it could turn negative by May-June this year. It is then when we will see actual fall in prices of goods. I see inflation at 4 to 5 percent in one year and beyond," he said.

According to Shubhada Rao, chief economist at Munbai-based Yes Bank, "The dramatic decline in this week's inflation number is essentially a reflection of a very strong base effect."