Consumer price inflation (CPI) rose 7.3 per cent year-on-year in June, the slowest pace in 43 months. The fall in inflation was broad-based with all three components, core, food and fuel moderating sharply.

(Also read: June inflation eases, but drought risks persist)

What led to the fall in inflation?

1) Inflation came down sharply in June because of a positive base effect. Inflation levels were very high in 2013-14, so comparing prices with last year will make this year's number look small.

2) The consumer food price index, which constitutes nearly 43 per cent of the CPI index, moderated to 7.98 per cent as compared to 11.98 per cent in June 2013 and 9.56 per cent in May 2014. Nirmal Bang says the Modi government's prompt response to the recent rise in onion prices helped stall inflationary pressure. The government increased the minimum export prices of onion as well as potato. The Centre has already asked states to delist fruits and vegetables from Agriculture Produce Marketing Committees (APMCs) so that the farmers have the option of selling their produce in the open market apart from using the traditional mandi set-up. The government has also cracked down on hoarding to curb food prices

3) Nomura says core CPI inflation is likely to continue to moderate given the easing in rural wages and the sharp dip in sequential momentum.

Why the Reserve Bank will not cut rates next month?

RBI Governor Raghuram Rajan held benchmark interest rates at 8 per cent at the June policy meeting. He has raised rates three times since taking charge last September to bring down the stubbornly-high inflation. June's inflation is well below the RBI's target of 8 per cent by Q1 2015 and has raised expectations that the central bank may think about a rate cut in the next policy review on August 5. But, analysts do not expect the RBI to cut rates yet. Here's why,

1) The Indian Meteorological Department (IMD) as well as Skymet (a private weather forecaster) have forecast a sub-normal monsoon this year in the wake of a 70 per cent chance of El Nino occurring. This poses an upside risk to inflation. Overall, rains were 43 per cent below the seasonal average last week, resulting in a 51 per cent annual decline in the planting of summer crops.

2) In case of a significantly lower monsoon, food inflation could exert upward pressure on CPI inflation. Going forward, given its weight in CPI inflation, food inflation would continue to be a key determining factor of the inflation trajectory, Nirmal Bang said.

3) An uncertain outlook for global crude oil prices is also keeping India's policymakers off-balance. A spike in crude prices could also aggravate India's inflation, since the country imports nearly 80 per cent of its oil.

(With inputs from Reuters)