Food inflation turned negative in late December for the first time in many years as prices of vegetables like onion and potato declined, a development that may prompt the Reserve Bank to go for rate cuts at its next monetary policy review later this month.

Food inflation, measured by the wholesale price index (WPI), plunged to (-) 3.36 per cent as on December 24. This is the first time in almost six years, for which data with base year 2004-05 is available, that food inflation has shown a decline on an annual basis.

Encouraged by the development, Finance Minister Pranab Mukherjee said, "There has been substantial improvement. Food inflation has turned negative for the first time in the recent memory."

Food inflation stood at 0.42 per cent in the previous week. It was 21 per cent in the corresponding week of 2010.

According to official data released today, onion became cheaper by 73.74 per cent year-on-year during the week, while potato prices were down by 34.01 per cent. Prices of wheat fell by 3.41 per cent.

Overall, vegetables became 50.22 per cent cheaper during the week ended December 24.

The fall food prices has been substantial since the first week of November, when food inflation stood at double-digit.

"The environment appears to be in favour of the Reserve Bank reversing its monetary policy stance," Prime Minister's Economic Advisory Council Chairman C Rangarajan said.

RBI, which has raised interest rates 13 times since March, 2010 to contain inflation, has already paused rate hike in its December mid-quarter policy review.

The central bank is scheduled to announce next policy review on January 24.

Rangarajan said the fall in food inflation will help bring down headline inflation -- which also factors in manufactured items, fuels and non-food primary articles -- to below 7 per cent by March.

Experts attributed the decline in food inflation numbers to the "high base" of the previous year and to good kharif output. Food inflation was over 21 per cent in the same period last year.

"Food inflation has turned negative on the favourable impact of lower food prices and elevated base effect. It is probable that food inflation might remain subdued till mid- February," Standard Chartered Economist Anubhuti Sahay said.

She said while headline inflation is likely to cool to around 6.5-7.0 per cent by March-end, there is still concern over a weak rupee and its impact on fuel and manufactured products.

Manufactured inflation, which contributes to over 65 per cent of the WPI, basket is currently close to 8 per cent.

"We expect repo rate to be reduced in Q2 2012. However, the RBI may cut the Cash Reserve Ration (CRR) in the January policy meeting," she said.

Headline inflation, which also factors in manufactured items, fuel and non-food primary items, has been above the 9 per cent-mark since December, 2010. It stood at 9.11 per cent in November this year.

India Inc has blamed the high interest rates, which has led to increase in the cost of fresh borrowings, for hindering fresh investments and industrial growth.

While inflation in the vegetable and wheat segments eased during the reporting week, prices of protein-rich items such as eggs, milk and pulses have continued to remain high.

Pulses grew costlier by 13.85 per cent during the week under review, while milk grew dearer by 9.49 per cent and eggs, meat and fish by 13.82 per cent.