New Delhi, April 29: A new report from SBI Research emphasizes the importance of controlling inflation expectations amid ongoing uncertainty. The report warns that if the U.S.-Iran conflict remains unresolved for an extended period, the central bank may face challenges in managing inflation and mitigating the impact on economic growth.
During uncertain times, a competent central bank must be vigilant against miscalculations. It should maintain strong credibility, be well-organized, and possess the flexibility to adapt. Transparency is also vital to prevent uncertainty about the economy from translating into uncertainty about the central bank itself.
Dr. Soumya Kanti Ghosh, Chief Economic Advisor at the State Bank of India (SBI), noted that this aligns with remarks made by RBI Governor Sanjay Malhotra during a recent speech at Princeton University. This message can be interpreted as a forward-looking guidance.
Ghosh stressed that it is essential to robustly manage inflation expectations for effective monetary policy during uncertain times. He highlighted the need for a well-structured package that ensures orderly exchange rate flows with sufficient flexibility.
The report forecasts a negative balance of payments (BOP) of $28 billion for the fiscal year 2027, along with a negative trade balance. However, it anticipates a surplus of $26.5 billion in the capital account based on expectations of positive flows next year.
The exchange rate cannot be viewed as a mechanism that permanently absorbs shocks. Due to rising uncertainties and instabilities, it may transform into a conduit for imported inflation, which can undermine the core objectives of prudent and flexible monetary policy by stabilizing inflation expectations through various channels.
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