Geopolitical Disturbances, Climate Change New Challenges for Central Banks

 Mumbai: Continuing geopolitical disturbances and geo-economic fragmentations could pose daunting challenges to the central banks, warned the Reserve Bank of India (RBI) governor Shaktikanta Das on Tuesday. Das said that it has become important for central banks to remain vigilant and respond in a nimble, timely and calibrated manner while navigating such turbulences. Das' comments come at a time when the world is experiencing many instances of geopolitical unrest, including the ongoing Russia–Ukraine and Israel-Hamas wars.

Das was delivering the inaugural Himalaya Shumsher Memorial Lecture organized by Nepal Rastra Bank in Kathmandu.

“Continuing geopolitical disturbances and geoeconomic fragmentations will pose daunting challenges to the central banks. Experience of the past few years shows that the journey ahead may be marked by dynamic shifts in geopolitics, with frequent incidences of supply chain disruptions and greater barriers in trade, technology and capital flows. These will be the new sources of shocks, often not well captured in existing macroeconomic models,” he said.

Speaking about the new challenges for Central Banks in the 21st century, Das also listed climate change as a huge challenge that could become a systemic risk, if not addressed in time. “Severe climate or weather-related events which are becoming more frequent and intense can impact central bank’s core mandates of price and financial stability by causing sudden price pressures, damage to infrastructure, loss of economic activity and stress on fiscal balances.”

Climate changes can also impact the balance sheet of banks and other lenders. In recent years, there has been a growing role of regulatory policies in the climate policy toolkit. More work needs to be done in this front while recognising that central banks can supplement the efforts of governments and other authorities who will be at the forefront of climate related initiatives, he said.

He said technology and fintech innovations are opening possibilities and the challenge for central banks in this journey would be to steer digital innovation towards a more efficient, prudent and stable financial system, reaping the benefits of digital financial infrastructure (DFI) while further building on their track record as trusted safekeepers of price and financial stability.

He said that strengthening fundamentals is the best buffer for emerging market economies against global spillovers in an uncertain world. Fundamentals would include commitment to an inflation target, maintaining buffers in the form of reserves, and following a prudent and forward looking approach in financial sector policies, he said.