NEW DELHI — Central banks will face increasing challenges in managing inflation if global geopolitical tensions persist, particularly the ongoing U.S.-Iran conflict, according to a new research report released Wednesday by SBI Research.
The report warned that a prolonged conflict could complicate efforts to control inflation expectations while limiting the impact on economic growth.
“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,” the report said.
Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said the framework aligns with recent remarks by Reserve Bank of India Governor Sanjay Malhotra, suggesting that policymakers are signaling a cautious and adaptive approach.
The report emphasized that firmly anchoring inflation expectations is critical in times of uncertainty, underscoring the need for stable exchange rate management supported by flexible policy measures.
It projected India’s overall balance of payments to remain in deficit in fiscal year 2027, estimating a shortfall of $28 billion, with the trade balance also expected to stay negative. The capital account, however, is forecast to post a surplus of $26.5 billion, assuming continued positive capital flows.
The report cautioned that exchange rates cannot indefinitely serve as a shock absorber, as prolonged volatility may turn currency movements into a channel for imported inflation, undermining policy efforts to stabilize prices.
“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 said.
It also noted that uncertainty remains elevated globally, particularly due to tensions in West Asia, which could further complicate the economic outlook.
While monetary policy can help manage second-round effects of inflation — such as rising wages and prices — it has limited ability to counter supply-driven shocks directly, the report added, noting that such effects are not yet evident in the current environment. (Source: IANS)
