The Indian central bank sees stabilising core inflation, which excludes food and fuel prices, as a sign of easing price pressures in the economy.
Vegetable prices eased in August and brought down retail inflation to 6.8%. This is likely to continue in September, the Reserve Bank of India said in its monthly bulletin.
"The correction is not complete, and more is expected to drive down retail inflation in its September reading," the central bank said.
It added the correction in prices has moved beyond the three key vegetables - tomato, potato and onion - and the outlook for cereal prices has brightened, "supported by active supply side interventions".
While headline inflation remained above the central bank's comfort band of 2%-6%, core inflation dropped below 5% in August.
The RBI, however, said rising crude oil prices posed a new risk to global financial stability.
The central bank's economic activity index nowcasts GDP growth for the July-September quarter at 6.6%, slower than the 7.8% in the first quarter.
This has, however, partly driven a normalising base. "Amidst weakening global prospects, the Indian economy is gaining strength led by domestic drivers," the RBI bulletin read.
(Reporting by Ira Dugal; Editing by Sohini Goswami)