TEL AVIV, Israel (AP) _ Israel's cost of living index rose by 12.1 percent in March, an indication that the inflation rate would go down this year, the Central Bureau of Statistics announced Monday.

Inflation was 13.5 percent in February and 10.7 percent last March. The March figure brought inflation for the first three months of the year to 33.9 percent. The statistics bureau said that figure projected to 225 percent for 1985, down from a record 445 percent in 1984.

The slowdown reflected the price and wage control policy in force since February. The policy originally provided for prices and wages to rise at an average rate of 5 percent a month, and for government subsidies on goods and services to be gradually wiped out.

Partly because of the technical difficulties in policing the gradual price rises, the government agreed with the Histadrut trade union federation and the private sector employers to raise all prices by 7 to 20 percent on April 1 and then freeze them for two months. Prices will be raised again at the end of the two-month period and then frozen again.

Wages will rise by about 8.5 percent in May to compensate partially for the price increases, Israel radio reported.

Inflationary pressures in the economy were also reduced in March, with no increase in the money supply for the first time in six months. The government had helped fuel inflation by printing an average of about $150 million worth of currency a month for the previous half-year.

The country's foreign currency reserves in March fell $54 million after a dramatic fall of $700 million in the previous three months. The reserves now stand at $2.13 billion.

But Israeli newspapers on Monday quoted senior Finance Ministry officials as warning that the country would suffer a serious foreign currency crisis by the summer if the government did not impose strict budget discipline and restrictions on the public's access to foreign currency.

Israel is still trying to win United States approval for emergency economic aid of about $1.5 billion during the next two years, in addition to regular economic and military aid of $3 billion this year.

Economics and Planning Minister Gad Yaakobi said in an interview last week that he believed the government would not exceed its $23-billion budget and would succeed in carrying out planned spending cuts. The government overspent its 1984 budget, which was also $23 billion, by $1.8 billion.