Towards Green Growth
Context:
The Reserve Bank of India (RBI) has recognized the increasing significance of climate change in its monetary policy considerations, particularly its potential impact on economic stability.
- The recent Monetary Policy Report highlights the risks posed by extreme weather events and climate shocks, emphasizing the need for climate mitigation policies to prevent significant economic output losses.
Relevance:
GS-03 (Economy)
Dimensions of the Article:
- Background
- Implications
- Suggested Measures
- Sovereign Green Bonds
Background:
- The RBI’s focus on climate risk and sustainable finance dates back to its July 2022 discussion paper, which highlighted the need for transition towards a green economy.
- Since then, the central bank has taken incremental steps to address climate change, acknowledging India’s ambitious goal of achieving net zero emissions by 2070.
- However, achieving this goal requires substantial investment, estimated at over $17 trillion, necessitating innovative financial mechanisms and policy interventions.
Implications:
- The inclusion of climate risk considerations in the Monetary Policy Report reflects a growing awareness of the potential economic impacts of climate change.
- The report’s warning about the long-term output loss of around 9% by 2050 in the absence of climate mitigation policies underscores the urgency of action.
- Moreover, the entrenchment of inflation hysteresis could lead to a de-anchoring of inflation expectations, undermining the central bank’s credibility and necessitating higher interest rates to curb inflation, further impacting economic output.
Suggested Measures:
- While the RBI has taken commendable steps towards green finance, such as issuing Sovereign Green Bonds and expanding the participation of Foreign Institutional Investors in green government securities, more comprehensive measures are needed.
- The RBI should conduct a thorough assessment of the quantitative and qualitative impacts of climate change on economic and financial stability, incorporating insights from sectoral views and developmental trajectories.
- Additionally, the development of a layered green taxonomy, inspired by global examples such as the European Central Bank’s green taxonomy and the ASEAN region’s evolving framework, can provide a structured approach to assessing the sustainability of economic activities and guiding investment decisions.
- By mitigating transitional risks to the financial system and promoting sustainable development, the RBI can play a pivotal role in steering India towards a green and resilient future.
Sovereign Green Bonds:
- Sovereign Green Bonds (SGrBs) represent a pioneering financial instrument designed to channel investments into environmentally sustainable projects.
- These bonds, issued by the Indian government, serve as a vehicle for funding initiatives aimed at mitigating climate change, promoting renewable energy adoption, and enhancing environmental resilience.
- By earmarking funds exclusively for green projects, SGrBs play a crucial role in aligning financial markets with environmental objectives and fostering a transition towards a greener economy.
