 "RBI Deputy Governor Michael Patra")
Patra highlighted that in the coming years, central banks will face significant challenges in conducting inflation-targeting (IT) monetary policy due to climate change.
India’s retail inflation is expected to align with the 4 per cent target on a “durable basis” in the next financial year 2025-26 (FY26), RBI’s Deputy Governor Michael Debabrata Patra has said, at a time when the government revealed that the CPI inflation for September had escalated to nine-month high of 5.49 per cent.
“In July and August 2024, inflation had 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,” Patra said in a speech on inflation targeting, which was posted on the Reserve Bank of India’s (RBI’s) website on Tuesday.
He also said that India’s experience is unique due to the 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.
The deputy governor 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,” Patra said.
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, he said.
First Published: Oct 15 2024 | 3:55 PM IS