The Reserve Bank today said it will assess if the declining trend in inflation is sustainable and accordingly take a decision on reducing the interest rate.
Inflation based on Wholesale Price Index (WPI) declined to 6.87% in July, from 7.25% in June.
Still, it is much above the RBI's 5-6% comfort level.
However, with the easing of inflation and contracting industrial output, the industry is clamouring for reduction in the interest rate to spur growth.
"Interest rates to fall when inflation drops. (RBI) will assess if the inflation fall is sustainable," RBI Deputy Governor K C Chakrabarty told reporters after meeting Economic Affairs Secretary Arvind Mayaram here.
He said 5% inflation is India's comfort zone.
The Reserve Bank is scheduled to review its monetary policy on September 17.
In its monetary policy review last month, RBI had kept key interest rate (repo rate) unchanged at 8% in view of high inflation.
After taking charge of the Finance Ministry this month, P Chidambaram had said that high interest rates "inhibit the investor and are a burden on every class of borrowers".
He had said steps would be taken to bring down interest rates.
