India's annual inflation rate dropped to its lowest since March in the week ended May 24, the government said on Sunday, and analysts forecast further falls that would allow the central bank to keep interest rates soft.

Wholesale price inflation eased to 5.65 per cent from 5.90 per cent a week earlier, the commerce and industry ministry said, led by a fall in the prices of fruits, vegetables and edible oil seeds.

The latest figure was below the average of 5.78 per cent forecast in a Reuters poll of 13 analysts.

"We should see prices falling further as the decline in oil prices pushes down costs for manufacturers," said B B Bhattacharya, economist with the Institute of Economic Growth, a New Delhi-based independent think-tank.

Domestic oil prices have fallen on lower international crude prices since the war in Iraq ended. India is heavily dependent on international crude oil, importing 70 per cent of its needs.

The index for non-food articles fell 0.8 per cent to 184.9 in the week ended May 24 from 186.3 a week earlier on lower prices of niger seeds, castor seeds and mustard seeds. The food articles index declined to 180.9 from 181.4 in the previous week.

Analysts said the easing in inflation would help the central bank continue with its near-three-year-old soft interest rates policy as the economy was yet to fully recover from last year's slowdown.

"I feel the interest rates scenario would remain soft with the central bank keeping rates stable for a while," said D.H. Pai Panandikar, director general of corporate think-tank RPG Foundation.

The Reserve Bank of India on Friday quashed market speculation it would cut its repo rate, a benchmark for short term interest rates, from the current five per cent.

The RBI said it would wait until a clearer picture emerges on the monsoon and inflation before taking a decision.

Domestic markets have been speculating for some time now that a global easing bias and the decline in inflation could prompt the RBI to lower its repo rate.

India's annual monsoon rains have hit the northeast but are yet to hit the southern coast, which usually receives the first spell of rains on June 1. The weather department expects the monsoon to hit the southern coast between June 8 and June 10.