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Towards a green growth
Context
The Reserve Bank of India (RBI) has highlighted the significant impact of climate change on the economy in its latest Monetary Policy Report, emphasizing the need for addressing extreme weather events and climate shocks.
Economic Impact of Climate Change:
- Needed consideration: The RBI's report underscores the importance of considering climate risks in monetary policy, indicating that extreme weather events and climate shocks could affect food inflation and the economy's financial stability.
- Macroeconomic impact: It employs a New-Keynesian model incorporating a physical climate risk damage function to estimate the macroeconomic impact of climate change, projecting a potential 9% lower long-term output by 2050 without mitigation policies.
- Loss: The report warns of inflation hysteresis leading to a de-anchoring of inflation expectations, necessitating higher interest rates to curb inflation and resulting in greater output loss.
RBI's Efforts Towards Green Economy:
- RBI’s approach: The RBI has been gradually addressing the transition to a green economy since its July 2022 discussion paper on climate risk and sustainable finance.
- Green methods: While acknowledging India's need for over USD 17 trillion to achieve net zero ambitions by 2070, the RBI has introduced initiatives like Sovereign Green Bonds and expanded participation in green government securities by Foreign Institutional Investors.
- Required measures: The RBI should focus on assessing the quantitative and qualitative impact of climate change on economic and financial stability, promoting the development of a layered green taxonomy reflective of India's diverse developmental trajectories to mitigate transitional risks.
Mains Question:
Discuss the significance of climate change considerations in the Reserve Bank of India's monetary policy framework and examine the measures needed to address climate-related risks for ensuring financial stability and sustainable economic development in India.
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