RBI's Next Move: Experts Predict a Crucial Pause Amid Evolving Economic Landscape

As the Reserve Bank of India's Monetary Policy Committee (MPC) gears up for its pivotal meeting, the financial world is buzzing with anticipation. A consensus is rapidly forming among economists and market analysts: a pause in the repo rate hike cycle is the most likely outcome. This decision, if it materializes on June 8, would mark a significant shift after a series of aggressive rate increases aimed at taming inflation.

Since May 2022, the RBI has implemented a cumulative 250 basis points (bps) hike in the repo rate, bringing it to 6.5 percent.

This proactive stance was a direct response to soaring inflation. However, recent economic indicators suggest that these measures are beginning to bear fruit. Retail inflation has been on a downward trend, dropping to an 18-month low of 4.7 percent in April. This welcome deceleration, coupled with relatively stable food prices, provides the RBI with much-needed breathing room.

Economists are keenly observing both domestic and global cues.

While India's core inflation remains somewhat sticky, global central banks are also showing signs of slowing their tightening pace. The US Federal Reserve, for instance, signaled a potential pause after its May hike. This global recalibration gives the RBI further impetus to assess the impact of its previous actions before taking further steps.

While a pause is widely anticipated, the MPC's accompanying commentary will be scrutinized for future guidance.

Experts like Madhavi Arora, Lead Economist at Emkay Global Financial Services, highlight the balancing act: managing domestic growth concerns against lingering inflation risks. Others, such as Suman Chowdhury, Chief Economist at Acuité Ratings & Research, point to the current repo rate already factoring in significant disinflationary trends.

The central bank's stance on liquidity management will also be key.

After a period of surplus liquidity, the system recently saw a shift towards deficit. The RBI's approach to maintaining appropriate liquidity conditions without disrupting financial stability will be a critical part of its forward guidance.

Looking ahead, while the immediate focus is on a pause, the battle against inflation isn't entirely over.

Potential risks like the El Niño phenomenon, which could impact agricultural output and food prices, remain on the horizon. Therefore, while a pause is expected, the RBI is likely to maintain a 'withdrawal of accommodation' stance, signaling readiness to act if inflation pressures reignite. This cautious optimism encapsulates the current economic outlook, where stability is sought amidst ongoing uncertainties.