New Delhi, Apr 17 (IANS): India's inflation declined marginally to 6.89 percent in March as compared to 6.95 percent in the previous month, helped by softening in prices of manufactured products, giving rise to the hope for first rate cut by the central bank in three years when it announces annual monetary policy Tuesday.

However, the monthly wholesale price index data released by the ministry of commerce and industry Monday showed that inflationary pressure continued in the system.

Food inflation soared to 9.94 percent in March mainly due to a sharp increase in prices of vegetables and milk.

Finance Minister Pranab Mukherjee said rise in the prices of food items were disturbing and the government would take necessary steps to address the supply-side bottlenecks to ease the prices.

"Food inflation in the month of March has increased which is a disturbing factor. Supply side constraints have substantially affected food inflation. We will be addressing that," Mukherjee said, reacting on the monthly figures.

The finance minister said the government would have been more comfortable had the inflation declined to the level of 6.5 percent.

Prices of vegetables surged by 30.57 percent year-on-year in the month under review, milk became costlier by 15.29 percent, pulses became dearer by 10.05 percent and prices of egg, meat and fish rose by 17.71 percent.

However, onion, fruits, wheat, fibres and non-food articles became cheaper during the last month of 2011-12 when compared to the price of these items in the corresponding month of previous year.

Meanwhile, the government revised upward the January inflation data to 6.89 percent as compared 6.55 percent announced earlier.

Build-up inflation in 2011-12 was 6.89 percent as compared to a build up of 9.68 percent in the previous year.

Manufactured products, which have almost 65 percent weight in the Wholesale Price Index (WPI), showed moderation in prices. Inflation in manufactured products moderated to 4.87 percent in March as compared to 5.75 percent in the previous month.

Industrial output grew by lower than expected 4.1 percent in February, according to official data released last week.

Continued inflationary pressure and lower than expected growth have added to the dilemma of the central bank.

It is widely expected that the Reserve Bank of India would lower policy rates by 0.25 percent Tuesday in its monetary policy for 2012-13. The RBI has not cut rates in the last three years.

Industry associations have been pitching for rate cut to stimulate growth.

"FICCI believes that the stage is now set for a rate reversal by the RBI by at least 50 basis points, beginning tomorrow," the Federation of Indian Chambers of Commerce and Industry (FICCI) said in a statement.

"Such a move is also consistent with RBI's stance that policy rates have peaked off and will be headed lower from here on," it said.

Sandip Somany, president, PHD Chamber, said re-emergence of food inflation may trigger the downside risks to economic growth vis-à-vis global economic slowdown.

"Hence, drastic policy actions needed to resume the comfortable growth trajectory," Somany said.

In the "macroeconomic and monetary developments" document released a day before the annual monetary policy statement for 2012-13, the RBI said India's economic growth is likely to improve marginally in the current financial year from the projected growth of 6.9 percent in 2011-12 but inflation will remain "sticky" due to high oil prices, impact of hike in taxes, wages and large suppressed inflation.

"With significant upside risks to inflation, monetary policy needs to keep them anchored, while shifting the balance of policy to arrest the deceleration in growth momentum," the central bank said.