Remarks by Shri Shaktikanta Das, Governor,
Reserve Bank of India
At the Macro Week 2024 organised by the Peterson Institute for
International Economics (PIIE), October 25, 2024, Washington DC
I am happy to be here today at the Macro Week 2024 organised by
the Peterson Institute for International Economics (PIIE). The
Institute has established itself as a leading forum, bringing together
public policy practitioners, central bankers, industry leaders,
research professionals and scholars to brainstorm on emerging
macroeconomic issues. Such discussions, especially on the
sidelines of the International Monetary Fund and World Bank
meetings, provide fertile ground for rigorous and meaningful
interactions on matters of contemporary policy relevance.
2. In my remarks today, I propose to share some of my thoughts
on the international monetary agenda and its relevance in a world
confronted with economic and financial fragmentation. I shall also
touch upon why and how climate change needs to be part of central
bank narratives.
I. International monetary agenda
3.
Global economic dynamics is shifting rapidly, driven by forces
such as technological transformation, geoeconomic realignments,
environmental challenges, and the ongoing global geopolitical
disruptions. In this rapidly changing context, it is incumbent upon
the G20 and international monetary institutions to adapt swiftly and
act decisively to foster global stability and sustainable growth. I
would like to highlight six areas of priority in this context, not in any
order of importance.
4.
The first and foremost priority should be accorded to
reforming the international financial architecture. This involves
prioritising inclusive global governance frameworks that better
reflect the realities of today's global economy. The current system,
while foundational, needs to reform itself to ensure equitable voice
and representation for the emerging economies. Enhanced access
to resources and a stronger role in the governance of institutions
such as the International Monetary Fund (IMF) and the World Bank
will not only enhance the legitimacy of these institutions but also
foster more serious global cooperation in addressing macro-
financial challenges.
5. Second, on the agenda should be the debt restructuring
mechanisms. While the G20's Debt Service Suspension Initiative
(DSSI) and the Common Framework for Debt Treatments were
commendable measures, the scale of the problem is much larger.
Debt restructuring processes remain ad hoc, slow, and - on several
occasions - not sufficiently transparent. This results in protracted
crises, causing unnecessary economic suffering for the debtor
countries. We need an overhaul of the debt resolution architecture
and its refashioning into one that involves both public and private
creditors, ensures timely debt restructuring, and links debt relief
with sustainable development objectives. Without such reform, the
vulnerable countries will continue to face unsustainable debt
burdens which will have repercussions for global financial stability.
6. Third, we must recognise the fragility and fault-lines of the
global monetary and financial system, both institutions and
markets. Recent years have highlighted the risks posed by financial
instability, in both advanced and emerging markets. There indeed
is a pressing need to improve global financial regulation to
manage systemic risks posed by private capital and non-bank
financial intermediaries, which now hold significant portions of
global assets. The rise of shadow banking and fintech, and the
growing footprint of decentralised finance, require more robust
regulatory oversight to prevent contagion effects and ensure
financial stability as a global public good.
7. The fourth area of concern is the digital divide. As the global
economy becomes more digitalized, countries that lack the
infrastructure, skills, and regulatory frameworks for digital inclusion
risk falling further behind. The G20 and the international monetary
and financial institutions should work towards nurturing an
ecosystem that promotes investment in digital public infrastructure,
and widespread adoption of digital technologies while ensuring
cybersecurity and privacy safeguards.
8. Fifth, geopolitical tensions are increasingly affecting economic
policies, leading to sanctions, weaponisation of finance, trade
restrictions and supply chain disruptions. This is causing
economic fragmentation, as countries aim for strategic
independence in key areas like energy, technology and strategic
materials like semiconductors and critical minerals. The G20 must
play a key role in preventing further economic fracturing by
promoting open and rules-based trade systems. While recognising
the need for countries to secure their supply chains in tactically
important sectors, the G20 should foster cooperation in areas such
as technology transfer, investment in global public goods, and
green transition.
9. Sixth, perhaps and above all, climate finance must be at the
forefront of the G20's priorities and the international monetary and
financial agenda. The international financial system must mobilise
significantly greater resources to fund the transition to a low-carbon
economy. The G20 must also coordinate national efforts to ensure
that climate policies do not lead to protectionism, unilateral trade
barriers or trade conflicts. The rise of border carbon adjustments
(BCAs) and similar measures must be managed through
cooperative frameworks to avoid unnecessary economic
fragmentation. Additionally, there is an urgent need for innovative
financial instruments that can incentivise private capital to flow into
climate related efforts. Without a fundamental shift in the way the
international monetary and financial systems address climate
finance, we risk exacerbating environmental degradation and
global inequality.
10. We live in an era of high uncertainty and turmoil, where the
job of policy makers is something like steering a vast,
interconnected fleet through turbulent seas, where the old maps no
longer suffice. The time for incremental changes has gone. What
is needed now is a transformative action agenda which would
ensure that the global economic and financial architecture serves
all nations and peoples and not just a select few. With collective
action and renewed commitment to multilateralism, we can build an
international monetary and financial system that is truly fit for the
21st century.
II. Economic and financial fragmentation
11. Global co-operation and the integration of global markets, in
particular, were instrumental in driving decades of world growth.
For many low-income countries and emerging markets, this
integration into the global economy was a crucial contributor to their
development. It provided them access to affordable imports,
extensive export markets, and foreign technology. Now, however,
geo-economic fragmentation is weighing on the outlook for global
growth.1 The geopolitical risk index2 has spiked sharply in 2024
amidst increases in trade restrictions and financial sanctions. This
has reversed the substantial benefits from global economic
integration3. There are now fears of de-globalization and increasing
regionalization. This could dampen the convergence of emerging
and developing economies to better living standards. Geopolitical
risks are also imparting heightened volatility to capital flows and
asset prices. They are also undermining the efficiency of the global
payments systems.
12. Cross-border flows of goods, services, and capital have
levelled off since the global financial crisis. Recent geopolitical
events have further fuelled protectionism alongside an increase in
trade and logistics disruptions4. For many low-income countries
1
A study by IMF staff in August 2023 suggested that greater international trade restrictions could reduce
global economic output by as much as 7 percent over the long term, or about USD 7.4 trillion in today's
dollars. That is equivalent to the combined size of the French and German economies, and three times
sub-Saharan Africa's annual output (The High Cost of Global Economic Fragmentation, IMF Blog, August
2023).
2
Caldara, Dario. and Iacoviello, Matteo (2022), "Measuring Geopolitical Risk", American Economic Review,
Vol. 112, No 4, April, pp. 1194 1225.
3
Financial Stability Report, RBI; June 2024.
4
Chapter 1, Geoeconomic Fragmentation: The Economic Risks from a Fractured World Economy. CEPR
and IMF, 2023.
and emerging markets, potential losses due to de-globalization
could be much greater. Despite these downside risks, it is
heartening to see recent projections which suggest global goods
trade will post an increase of 2.7 to 3.1 per cent increase this year5.
Even as this near term resilience gives hope, remaining alert to the
changing winds is important while preparing for an increasingly
uncertain outlook.
13.
Recently, global value chains (GVCs) have also seen
significant disruptions due to both geo-political events and
overarching issues like the pandemic and climate crisis. This has
raised concerns regarding the reliability of the GVCs as engines of
growth. Discussions regarding 'friend-shoring' and 'reshoring' are
spreading dissonance and fears of discriminatory measures
against foreign competitors. In such a trade environment, it is the
'bystanders' that would be disproportionally affected.
14. Other forms of fragmentation - like technological decoupling
and disrupted capital flows - would also have their adverse effects
and raise costs. They can also impact funding costs of banks and
domestic financial institutions, reduce their profitability, and prompt
them to contract lending, with potentially adverse effects on
economic activity. Building up adequate international reserves as
well as capital and liquidity buffers within the national financial
systems would be vital to reduce the vulnerability of emerging
economies to such adverse external shocks.
15. Finally, there is the apprehension that if geo-economic
fragmentation continues unabated, countries may seek to become
less reliant on the international financial infrastructure and global
standards. Fragmentation of the international monetary system
could have serious implications for markets. New parallel systems
that lack inter-operability may emerge, which means higher
transaction costs and other inefficiencies. Strengthening crisis
preparedness to deal with the fallout from these tensions, including
unanticipated ones, should be a policy priority for emerging market
economies. The global financial safety net must be reinforced
through mutual agreements between countries. This may include
regional safety nets, currency swaps, fiscal mechanisms, and
precautionary credit lines from international financial institutions. If
these things do not happen, emerging economies will have to
substantially augment their own safety nets and buffers.
III. Central banking and climate change
16. Traditional views on climate change policy have given way to
a more updated multi-regulator approach to tackle the unfolding
repercussions of extreme climate events. Manifestation of these
risks through demand-supply shocks, productivity losses, asset
revaluations and transition to a low-carbon ecosystem at high cost
can impair financial, monetary and price stability 6. To my mind, the
question, therefore, is not whether central banks should take into
account climate change but how should this consideration be
integrated to their central mandates. This involves, first,
understanding the impact on price stability, given the high costs
and other transition risks involved in progressing towards a low-
carbon economy7. Second, it is important to assess the impact on
financial stability in all its ramifications8. Third, it is necessary to
balance micro prudential responsibilities9 to help financial
institutions to manage material risks associated with climate
change. Fourth, robust analysis and research are needed to enable
advocacy and thought leadership10 in this space11.
17. The Reserve Bank of India does not have an explicit remit for
dealing with climate related risks. It is an inferred responsibility
7
Monetary Policy and climate change- Key takeaways from the membership survey and areas for further
analysis, July 2023 - NGFS.
8
The Implications of Climate Change for Financial Stability, Financial Stability Board, 2020.
9
Principles for the effective management and supervision of climate-related financial risks, Basel
Committee on Banking Supervision (BCBS), 2022.
10
Central Banks of Australia, Brazil, France, Germany. Japan, Malaysia and the European Central Banks
have dedicated central bank units working on climate-related tasks.
11
In May 2021, Reserve Bank set up a Sustainable Finance Group (SFG) within the Bank to effectively
counter climate change-related financial risks, and for leading regulatory initiatives in areas of sustainable
finance and climate risk.
derived from its macroeconomic and financial stability mandates.
This has encouraged the quest for suitable instruments and
actionable frameworks. The Reserve Bank of India has set up a
sustainable finance group (SFG) within the Bank and has also
joined the Network for Greening the Financial System (NGFS) in
2021. Some of the steps already taken by the Reserve Bank
include promoting green finance initiatives such as inclusion of
finance to renewable energy projects in directed lending (Priority
Sector Lending) by banks; issuance of sovereign green bonds
(SGrBs); establishing a framework for acceptance of 'Green
Deposits'; and developing a Disclosure Framework on climate-
related financial risks and Guidance on climate scenario analysis
and stress testing.
18. At the cross-country level, I believe it is important to give due
acknowledgement to the sharp trade-offs central banks face when
dealing with climate-related risks. On the one hand, central banks
have to operate within the confines of their specific legal
frameworks and, as publicly accountable institutions, they have to
provide rigorous evidence in support of all their actions. On the
other hand, central bank balance sheets might already be exposed
to climate-related risks and they may be forced to respond to them
from behind the curve.
19. While recognising that the government is the most appropriate
and effective authority to spearhead climate action, each country -
based on its domestic conditions - has to decide between having
explicit climate mandate for the central bank or subsuming it into
its price and financial stability mandate.
IV. Conclusion
20.
As I conclude, let me briefly speak on the Indian
macroeconomic experience. The Indian economy rebounded from
the severe contraction imposed by the COVID-19 pandemic and
averaged a real GDP growth of above 8 per cent during the last
three financial years. For the current year (2024-25), the Reserve
Bank of India has projected real GDP growth of 7.2 per cent, with
risks evenly balanced around this forecast. Improving domestic
demand, lower input costs and a supportive policy environment12,
are spurring manufacturing activity. The services sector has been
displaying strong growth. The growth outlook reflects the
underlying strength of India's macro-fundamentals, with domestic
drivers - private consumption and investment - playing a major
role. The government's thrust on capex and healthy balance sheets
of banks and corporates are expected to support private
investment. Private consumption, the mainstay of aggregate
demand, appears to be on track for a strong improvement due to
the favourable agricultural outlook and the pickup in rural demand.
Sustained buoyancy in services would also support urban demand.
21.
Resilient growth has given us the space to focus on inflation
so as to ensure its durable descent to the 4 per cent target. The
headline inflation trajectory is projected to sequentially moderate
from the last quarter of this financial year. Unexpected weather
events and worsening of geopolitical conflicts constitute major
upside risks to the inflation outlook.
22. A continuing priority for the Reserve Bank has been to
strengthen the financial sector. The health parameters of banks
and non-bank financial companies (NBFCs) are now very robust.
This has resulted in sustained credit flows, especially to the remote
and underserved segments, bolstering financial inclusion.
23. As I said in my last monetary policy statement, today, the
Indian economy presents a picture of stability and strength. The
balance between inflation and growth is well-poised. The external
sector demonstrates the strength of the economy. Forex reserves
are scaling new peaks. Fiscal consolidation is underway. The
financial sector remains sound and resilient. Global investor
optimism in India's prospects is perhaps at its highest ever. We are,
however, not complacent, especially amidst the rapidly evolving
global conditions.
Thank you.