By Rajesh Kumar Singh and Manoj Kumar
NEW DELHI, May 14 (Reuters) - India's headline inflation fell below 5 percent in April, putting it back in the central bank's comfort zone for the first time in more than three years and fuelling market hopes for more monetary easing to revive the economy's pedestrian growth rate.
April's reading of 4.89 percent was the lowest since November 2009 and well below the 5.50 percent estimated by analysts in a Reuters poll. The wholesale price index, India's main inflation measure, rose an annual 5.96 percent in March.
The number sparked gains in bond markets, which had already rallied since last week on expectations easing inflation would lead the RBI to cut interest rates further.
'It is a frenzy. The market is pricing in a rate cut,' said Ashish Vaidya, head of treasury at UBS in Mumbai.
Inflation was mainly cooled by a moderation in food and fuel costs along with ebbing demand-driven price pressures.
Food inflation dropped to 6.08 percent in April from 8.73 percent a month ago. Fuel prices rose 8.84 percent on the year compared with an annual rise of 10.18 percent in March.
Non-food manufacturing inflation, which the central bank monitors to gauge demand-driven price pressures, slowed to 2.77 percent in April from 3.5 percent a month ago.
'With food prices expected to remain stable, manufacturing prices weak due to slow growth and commodity prices stable, inflation in expected to be on a broad downtrend for the next six months and this, we believe, opens up room for more rate cuts,' said Rahul Bajoria, Regional Economist at Barclays Capital in Singapore.
'We think there is a possibility of as much as 75 basis points more rate cuts in the next six months, including 25 basis points in the next policy in June.'
The RBI flagged a high current account deficit earlier this month as the biggest risk 'by far' to Asia's third-largest economy, even as it cut interest rates by a quarter point for the third time since January.
However, many believe slowing headline and retail inflation along with a improvement in trade deficit should allow the bank to deliver another rate cut by mid-2013.
Government data showed on Monday that annual retail inflation slowed by a full percentage point to a 14-month low of 9.39 percent in April, the second consecutive drop.
(Reporting by Rajesh Kumar Singh and Manoj Kumar, Editing by Frank Jack Daniel and Simon Cameron-Moore) Keywords: INDIA ECONOMY/INFLATION
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