Retail inflation cooled to a three-month low of 6.77% in October, prompting speculation that the Reserve Bank of India’s (RBI) next monetary cycle in December could see a milder interest rate hike of 35 basis points.

The slowing down of inflation, from the five-month high of 7.41% in September, was led by weaker food and commodity prices, government data showed.

Still, consumer price-based inflation, or retail inflation, was above the RBI’s upper tolerance limit of 6%. In fact, CPI-based inflation has been above the RBI’s upper band target for the tenth straight month this year.

Wholesale inflation also cooled to a 19-month low of 8.39% in October. It was below a double-digit rise for the first time since March last year. In the previous month, WPI-based inflation was 10.7%.

Aditi Nayar, chief economist at ICRA, expects CPI inflation to soften to 6% in November due to the high base effect. “The total area sown under the ongoing rabi season has risen by 16.5% year-on-year as on 4 November, driven by rice, wheat, pulses and oilseeds, auguring well for prices going ahead. Additionally, a high base is likely to limit a hardening in the y-o-y food inflation in the second half of FY23, even though perishables’ prices may remain firm in the immediate term," she said.

Nayar, however, said the near-term outlook could be clouded by a few risks, including  the recent sequential rise in prices of global commodities, supply disruptions for perishables owing to excess rains and a robust demand for services.

The market is expecting the RBI to hike the repo rate by 35 basis points, lower than its earlier cycle of rate increases since May this year. The central bank has already raised rates by 190 basis points since May to 5.90% to contain inflation.

“Given the moderation in the domestic inflation trajectory, some incipient moderation in US inflation, and possibility of a global slowdown, we expect the RBI to hike repo rate by 35 bps to 6.25% in the December policy followed by an extended pause to watch for the impact of past rate hikes, liquidity tightening, and global macro scenario,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.