Deepak Mohanty: The importance of inflation expectations

I thank Dr. Sesha Iyer and Dr. Pattnaik for the invitation to address this young audience. In monetary analysis and policy, inflation expectations play a pivotal role. Recently, in many advanced economies, central banks have substantially expanded their balance sheets, which is apparently inflationary. However, central banks in these countries allay the inflation concerns by indicating that, despite substantial monetary easing, medium-term inflation expectations remain well anchored. One inference, therefore, is that inflation in future is unlikely to go up if inflation expectations do not go up. In India, we have the opposite problem: elevated current and expected inflation constrains the Reserve Bank in substantially easing monetary policy. This suggests that central banks, assign a significant weight to inflation expectations in their monetary policy assessment.