The Wholesale Price Index increased 3.74 percent year on year -- far below market forecasts of around 4.40 percent -- and sharply lower from 5.19 percent last month. I was also the lowest since October 2009 thanks largely to a drop in fuel and metals prices, the data showed.
The figures will come as welcome news for Prime Minister Narendra Modi's government, which swept to power to May promising to tackle high inflation that has long angered voters.
They also reduce pressure on the hawkish central bank to hike already-steep interest rates that businesses say have hindered growth-stimulating investment.
Reserve Bank of India Governor Raghuram Rajan has made taming inflation one of its top priorities, despite business leaders clamouring for rate cuts. The Consumer Price Index eased in August to 7.8 percent year-on-year from 7.96 percent the previous month, data showed Friday, although that is still above the central bank's target of six percent by 2016.
While still keenly watched, the Wholesale Price Index has been ceding ground to the Consumer Price index as a measure used by the central bank to set monetary policy.
The bank last cut interest rates in May 2013 but has pushed them back up in subsequent months, citing persistent inflation.