News Excerpt:

A notable feature of the Reserve Bank of India’s (RBI’s) latest Monetary Policy Report is the primacy given to “extreme weather events” and “climate shocks,” which affect not only food inflation but also likely have a broader impact on the natural rate of interest, thereby influencing the economy’s financial stability.

Key highlights of the report:

• The report mentions a “New-Keynesian model that incorporates a physical climate risk damage function” being used to estimate the “counterfactual macroeconomic impact of climate change vis-à-vis a no climate change scenario”. 
• The report warns that the “long-term (economic) output” could be lower by around 9% by 2050 in the absence of any climate mitigation policies. 
• If inflation hysteresis gets entrenched, it may lead to a de-anchoring of inflation expectations. Undermining the central bank’s credibility would warrant higher interest rates to curb inflation, leading to greater output loss.

RBI’s Steps for a Green Economy:

• RBI has made incremental progress in addressing the transition to a green economy, even while admitting that India requires over $17 trillion to achieve its net zero ambitions by 2070.
• European Central Bank has aided the formulation of a green taxonomy for the entire Eurozone’s economic value chain.
• The Reserve Bank suggested that banks and other financial institutions could consider eliminating the use of paper at their branches as well as introduce e-receipts at ATMs to mitigate adverse impacts of climate change.
• RBI has proposed climate risk-related financial disclosure and reporting for Regulated Entities (REs), capacity building, and voluntary initiatives.
• On a voluntary basis, the REs should set up targets for increasing funding to green projects in the short, medium, and long term for certain identified sectors.
• Also, the REs may like to convert all their data centres to green data centres by switching over to renewable energy for sourcing power for the data centres and implementing guidance provided by established frameworks like the Green Data Centre Rating Systems,

Way forward:

• The RBI and the Finance Ministry could take inspiration from the developing world, especially the ASEAN region, where a layered green taxonomy as a living document keeps getting updated with sectoral views of possible sustainable trajectories. 
• The issuance of ₹16,000 crore worth of Sovereign Green Bonds and the expansion of the resource pool by allowing Foreign Institutional Investors to participate in future green government securities are welcome steps. 
• RBI must undertake a thorough assessment of the quantitative and qualitative impact on economic and financial stability due to climate change. 
• It must encourage administrative consultation to begin populating a layered green taxonomy that is reflective of India’s fragmented developmental trajectories.
• The effort should be to mitigate the transitional risks to the financial system as the economy moves towards a sustainable future.