Monetary Policy Options Under Conditions of High Uncertainty

Faced with conflicting demands, India's central bank should wait for uncertainties to play out before it makes a rate move

- SUDIPTO MUNDLE

The end of the killing and destruction in Gaza, the Hezbollah-Israel peace deal in Lebanon and the regime change in Syria have considerably eased tensions in West Asia. But high global uncertainty prevails. How long will the Gaza accord last? War is still ongoing in Ukraine, as are civil wars in Sudan and Congo. Most disruptive of all, US President Donald Trump's inaugural address made clear that he will do much of what he had threatened—massive deportation of illegal and legal migrants; drastic tariff hikes against adversaries, neighbors and allies; a trade and technology war against China; an exit from the Paris Accord; and the maximization of US oil production.

Cutting the supply of low-cost migrant workers and hiking import duties will sharply increase US production costs and rekindle inflation. The Federal Reserve will then have to halt—perhaps even reverse—its gradual reduction of interest rates. Recent US growth has been robust, but raising interest rates again will weaken it.

A full-fledged trade and technology war with China will further disrupt global supply chains and technology flows. Although this will also yield some opportunities for other countries, it will add to China's woes in the real-estate sector. Despite China's stimulus package, the International Monetary Fund projects that the growth of its economy will fall from 4.8% in 2024 to 4.6% this year and further to 4.5% in 2026.

Such a slowdown in the world's largest and second-largest economies will hurt global growth, calling for expansionary macroeconomic policies and lower interest rates around the world.