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Patra highlighted that in the coming years, central banks will face significant challenges in conducting inflation-targeting (IT) monetary policy due to climate change.
The domestic headline retail inflation is expected to align with the 4 per cent target on a durable basis in the financial year 2025-26, said Michael Debabrata Patra, deputy governor, Reserve Bank of India (RBI) on Monday. The speech was published on the RBI website on Tuesday.
“In July and August 2024, inflation has fallen below the target. It is projected to average 4.5 per cent in 2024-25 before aligning with the target on a durable basis in 2025-26,” he said.
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He also said that India’s experience is distinctive due to recurring shocks to food and fuel prices, which have posed challenges for monetary policy. In India, price stability is a shared responsibility, with the government setting the inflation target and the central bank working to achieve it. This framework enables effective coordination between monetary and fiscal policies without compromising financial stability, fiscal consolidation, or growth—potentially serving as a model for other countries vulnerable to inflationary pressures from supply shocks.
Patra highlighted that in the coming years, central banks will face significant challenges in conducting inflation-targeting (IT) monetary policy due to climate change.
He said that climate-related supply shocks, such as food and energy shortages, as well as a decline in productive capacity, can lead to inflation volatility. Demand shocks may also arise from the loss of wealth in firms and households caused by frequent natural disasters. These shocks, along with physical and transition risks, can weaken financial institutions and banks, limiting the credit flow to the economy.
Climate uncertainty might prompt households to save more, lowering the real equilibrium interest rate. Furthermore, currency depreciation in countries hit by climate disasters can create financial instability, raise import costs, and worsen terms of trade, all of which impact inflation-targeting mandates. Central banks, including the RBI, are responding by promoting green finance, managing climate-related risks, and fostering ecosystems for green bonds and climate financing. The growing consensus is that central banks are well-suited to address climate change, but the challenge lies in integrating these issues into inflation-targeting frameworks.
First Published: Oct 15 2024 | 3:55 PM IST
