Climate change can disrupt economic stability: RBI deputy governor

In an important statement at the New York Fed Central Banking Seminar on Thursday, Reserve Bank of India (RBI) deputy governor Michael Debabrata Patra spoke of the increasing role of central banks and financial sector regulators in addressing climate change.

Patra highlighted the significant impact of climate change on financial institutions, asserting that they are poised to become substantial stakeholders alongside governments in the fight against climate change. He argued that climate change directly threatens central banks' mandates, affecting both price and financial stability.

The deputy governor outlined the various ways in which climate change can disrupt economic stability, including supply shocks such as food and energy shortages, declines in productive capacity, and demand shocks owing to the loss of wealth caused by natural disasters.

He stressed that physical and transition risks associated with climate change could impact the balance sheets of financial institutions, limiting their ability to provide credit to the real economy.

Patra also revealed that the RBI conducted a survey on climate risk and sustainable finance in January 2022, assessing the status of climate risk in leading scheduled commercial banks. Furthermore, in January-February 2023, the RBI issued sovereign green bonds worth $2.2 billion (Rs 16,000 crore) in two tranches to mobilise resources for green infrastructural investments. In April 2023, the RBI introduced a 'Framework for Acceptance of Green Deposits' to address climate issues.

Despite acknowledging that climate change was not traditionally a part of central banks' narrow mandate focused on stability, Dr. Patra argued that accumulating evidence compelled them to act. He mentioned the RBI's initiative to delve into the economics of climate change, incorporating the findings into their flagship publication, The Report on Currency and Finance, as a small contribution toward a greener, cleaner India.

Patra also highlighted the global perspective on climate action, noting that 23 per cent of countries have made climate targets a legal obligation, while 18 per cent have proposed to do so. The remaining 59 per cent have pledged in official policy documents, representing around 73 per cent of global CO₂ emissions.

In concluding his remarks, Patra emphasised the urgency of addressing climate change on multiple fronts, dispelling the notion of a trade-off between development and climate action. He called for global cooperation, stressing that the climate is a global public good and that humanity can reverse the impact of climate change by taking immediate and concerted action.