New Delhi, April 29
If the US-Iran conflict remains unresolved for a long duration, it can make the task of central banks arduous in their endeavour to rein in inflation expectations while minimising growth sacrifice, a new SBI Research report said on Wednesday.
In uncertain times, a good central bank should be cautious about false precision, forceful against high-cost tail risks, systematic enough to preserve credibility, flexible enough to adapt, and transparent enough that uncertainty about the economy does not become uncertainty about the central bank itself.
“This is exactly what might have been conveyed by RBI Governor (Sanjay Malhotra) in his recent speech at Princeton University and hence this communication may be also construed as a forward guidance,” said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India (SBI).
Monetary policy in times of uncertainty requires inflationary expectations to be firmly anchored. This directly implies the crucial importance of ensuring an orderly exchange rate movement in current times through a well-crafted package with sufficient agility, Ghosh stressed.
Overall Balance of Payments (BOP) is projected to be in negative territory in FY27 (-$28 billion) with trade balance projected to be negative as well.
The capital account is projected to be in surplus of $26.5 billion on the assumption of positive flows next year, said the report.
Exchange rate can not be construed a shock absorbing mechanism in perpetuity, as increased levels of uncertainties and volatilities render it to transform into a pass-through mechanism of imported inflation seeping through multiple channels, anchoring inflationary expectations and defeating at times the very purpose of prudent, and agile monetary policy making.
“It is thus imperative that a comprehensive set of measures are required given that BoP could be negative for the third consecutive year,” the report mentioned.
The level of uncertainty on the external front in general and the West Asia conflict, in particular, is high at this point.
Monetary policy has limited ability to quell the direct effects of a supply-induced inflation shock; it only has operational relevance once second-round effects are apparent. These effects are manifested in rising prices and wages when inflation expectations get un-anchored, which is not evident at present, said the report.
