India’s WPI rose by 3.74% in August.
Despite the moderation, analysts caution that the central bank is unlikely to lower the cost of borrowing in the near future.
That is because of poor monsoon rains that could affect future crops and drive food prices back up.
In addition, continuing geopolitical tensions could also see oil prices spiking up again.
Data also showed that falling global crude oil prices helped drive down India’s fuel inflation to 1.3% in September from 4.5% in August.
The figures came from India’s Commerce Ministry, which said food inflation declined by 1.4% as a result of lower prices for tea, fruits and vegetables, as well as maize, chicken and fish.
Asia’s third-largest economy has been plagued by chronically high inflation. But if price increases can be curbed in the long term, it could pave the way for the central bank to cut interest rates next year to help boost growth.
The Indian economy expanded by 5.7% in the April-to-June quarter as compared with the previous year.
India’s central bank, the Reserve Bank of India (RBI), kept its borrowing cost unchanged at 8% at its policy meeting last month, despite calls from industry lobby groups for the central bank to lower interest rates and support growth.
The RBI also signaled it would hold off cutting interest rates until it was confident that consumer inflation could be reduced to a 6% target by January 2016.
Earlier this week, data from India showed consumer prices rose by 6.46% in September from a year earlier. That is the lowest in nearly three years.
In August, consumer prices had risen by 7.73% from the previous year.
India monsoon India’s food crops are exposed to the annual monsoon season
Analysis: Sameer Hashmi, BBC News, Mumbai
Things have been looking up for Asia’s third largest economy in recent months, with growth touching a two-year high (for the April-to-June period) and now inflation dipping to a five-year low.
This will give more confidence to investors, who are very bullish on India at the moment.
The key takeaway from the latest data is that food prices have also fallen substantially.
With crude oil prices already low, this would mean more pressure on the Reserve Bank of India (RBI) to slash key lending rates.
And if inflation for the month of October, for which data will be released next month, falls further, then that will be a good enough reason to believe that the RBI may consider going for a rate cut in its next monetary policy move, which will be announced in December.
Industrial growth is still a weak link for the economy, with no signs of a pick-up.
Against that backdrop, the latest inflation data will provide more ammunition to industry, which has been clamoring for a rate cut.