India’s Inflation Surprise Opens Door for New Stimulus

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While the rapid pullback in India's headline inflation in April to its lowest level since 2009 is a reflection of stumbling demand in Asia's third largest economy, easing price gains were cheered by economists who believe the doors are now open for greater support from the country's central bank.

India's wholesale price index, the country's main gauge of inflation, rose just 4.89 percent year on year last month—far below expectations for a rise of 5.4 percent—and slower than 5.96 percent rise in March.

(Read More: India Benchmark Wholesale Inflation Slows in April)

High inflation has come in the way of monetary easing, but now that inflation is in the central bank's comfort zone of around 5 percent, analysts are expecting more rate cuts to boost flagging growth that has slowed to near 5 percent.

"Although the central bank's guidance remains cautious, we believe that the flow of macroeconomic data—continued downside surprises in inflation, a more benign current account and weak growth indicators is creating room for further monetary easing in the coming months," Rahul Bajoria, economist at Barclays, wrote.

Bajoria, who expects the Reserve Bank of India (RBI) to lower interest rates by 25 basis points at its next policy meeting on June 17, says the likelihood of further rate cuts of around 50 basis points to 6.5 percent over the course of the year, has risen "significantly."

The RBI last cut rates in May by 25 basis points to 7.25 percent but said that further easing would be difficult as "upside risks to inflation in the near term are still significant."

(Read More: India Central Bank Hints at No More Cuts, but Who's Buying That?)

"The RBI is likely to be a little red-faced by the degree of caution expressed at its 3rd May meeting," said Robert Prior Wandesforde, director of Asian economics at Credit Suisse. "The central bank has been consistently surprised by the weakness of wholesale price inflation over the last 6 to 7 months."

Prior Wandesforde, however, cautioned that elevated consumer price inflation and the significant widening of the country's trade deficit in April could postpone an interest rate cut until July.

Credit Suisse forecasts the central bank will reduce rates by a total of 50 basis points from current levels by the end of this year.

Inflation Expectations

Economists expect inflation to remain contained over the next few months as economic activity remains weak and commodity prices subdued.

"WPI inflation is well correlated with the global commodity cycle. If commodity prices remain here, or fall further, because there's no sign of global demand and on top of that domestic demand is weak—the trajectory for WPI will be lower," Sonal Verma, economist at Nomura, said on CNBC-TV 18.

"I don't have a floor in mind as far as WPI is concerned," Verma added.

By CNBC's Ansuya Harjani