Headline inflation, wholesale price index (WPI)-based inflation, slipped to a 38-month low of 6.62 per cent in January, raising hopes the Reserve Bank of India (RBI) with bring key interest rate down.

The level of WPI-based inflation, the most widely used measure of prices, recorded in January was the lowest since November 2009. In addition, January was the fourth consecutive month to record decline in the rate of inflation.

In December the rate of wholesale inflation was at 7.18 per cent, while in January last year it was at 7.3 per cent.

Core inflation (non-food inflation) slipped to a 34-month low of 4.1 per cent in January, close to the RBI's comfort level of 4 per cent.

Rate of inflation in manufactured products also slipped in January from the previous month, from 5 per cent to 4.8 per cent. However, the fuel index climbed, mainly due to pricier diesel.

The central bank is expected to be in a better position to bring down interest rates if the government sticks to its target of cutting fiscal deficit through a slew of harsh measures. However, declining savings rate will still pose challenges.

Commenting on the topic, Rohini Malkani of Citi said, "This brings to fore the RBI's dilemma of responding to industry demand to lower rates to boost growth versus the need to take the interests of savers into account."

The government has been nudging RBI to cut interest rates for long in order to provide a much-needed boost to the economy, but the central bank has declining to bring rates down due to high inflation.