Background: Learning to read is a complex process that involves phonological and orthographic processing abilities, broader language skills and cognitive processes across all writing systems. Although these components remain common, the pace of acquisition of phonological and orthographic processing and reading abilities differ across writing systems. Methods: This study aimed to understand the developmental pattern of reading and phonological processing, assess their interrelationship and study the predictors of reading ability among 175 children, learning to read Malayalam and attending Grades 1-3. They completed various reading (akshara reading, word and nonword reading) and phonological processing (rhyme recognition, syllable deletion, syllable segmentation, phoneme deletion, phoneme substitution, rapid naming and nonword repetition) tasks. Results: Grade and reading level-based analysis was performed to collate the results. Results revealed a significant overlap of phonological processing and reading abilities among children in Grades 2 and 3. Reading scores demonstrated a weak-to-moderate significant correlation with the phonological processing tasks. Although skilled readers performed significantly better on all phonological processing tasks, their scores did not reach ceiling. Syllable-level tasks were easier compared to phoneme-level tasks, and they significantly predicted the reading abilities of children. Conclusions: The findings contribute to the existing body of evidence for akshara writing systems, specifically in Malayalam alpha-syllabary. The development of phonological processing and reading in Malayalam extends beyond the third grade, and syllable processing contributed to increased variance in reading accuracy among inexperienced readers.