A recent SBI Research report highlighted the potential challenges central banks may face if the US-Iran conflict persists. The report emphasized the difficulty of managing inflation expectations while safeguarding economic growth. It stressed the importance of central banks maintaining flexibility, transparency, and credibility during uncertain times.
Dr. Soumya Kanti Ghosh, the Group Chief Economic Adviser at State Bank of India (SBI), suggested that RBI Governor Sanjay Malhotra’s recent speech at Princeton University could be seen as a form of forward guidance. Ghosh underscored the need for central banks to anchor inflation expectations firmly amid uncertainty, particularly by ensuring stability in exchange rate movements.
The report projected a negative Overall Balance of Payments (BOP) in FY27, with a trade balance also expected to be negative. However, it anticipated a surplus in the capital account, assuming positive flows in the coming year. The report cautioned against relying on exchange rate fluctuations as a long-term mechanism to absorb shocks, as this could lead to imported inflation and impact monetary policy effectiveness.
Amid heightened uncertainty, especially concerning the West Asia conflict, the report called for a comprehensive approach to address the negative BOP trend. It noted that while monetary policy may not immediately mitigate supply-induced inflation shocks, it becomes relevant once secondary effects, such as unanchored inflation expectations, start to materialize.
