RBI Governor Shaktikanta Das warns of future risks to central banking: Climate change and technology overreach

RBI Governor Shaktikanta Das addresses 21st-century central banking challenges, highlighting climate risks, technological integration, and need for adaptation.

In a thought-provoking address, Reserve Bank of India (RBI) Governor Shaktikanta Das outlined the formidable challenges looming over central banking in the 21st century, identifying climate risks and the over-permeation of technology in financial services as the foremost threats. Speaking at the inaugural Himalaya Shumsher Rana Memorial Lecture on ‘Central Banking in the 21st Century: Changing Paradigm,’ Das underscored the need for central banks to adapt to these seismic shifts, stressing their role in maintaining macro-financial stability through proactive measures.

Das highlighted climate change as an urgent systemic risk that, if left unchecked, could significantly disrupt central banking’s core objectives of price and financial stability. He pointed to the increasing frequency and intensity of extreme weather events, which could induce abrupt price pressures, damage critical infrastructure, impair economic activity, and strain fiscal balances. “These challenges could directly impact the balance sheets of banks and financial institutions,” warned the governor, emphasising the gravity of inaction.

The second significant challenge, according to Das, stems from the rapid integration of artificial intelligence (AI) and machine learning (ML) in the financial sector. While these technologies hold transformative potential for central banking, they introduce complex issues, including data privacy concerns, algorithmic biases, cybersecurity threats, and ethical dilemmas. “Central banks must enhance their capacities to manage these emerging risks,” he argued, urging financial authorities to strike a balance between innovation and prudence.

Fintech innovations present yet another layer of complexity. Das cautioned that as the financial system evolves with digital lending, data security, and third-party service providers, central banks must navigate the terrain carefully to ensure a stable, efficient, and transparent financial ecosystem. He called on central banks to leverage digital innovations while upholding their mandate of safeguarding price and financial stability.

Compounding these technological and environmental challenges are geopolitical disturbances and geoeconomic fragmentations. Das noted that recent experiences indicate an unpredictable landscape marked by supply chain disruptions and heightened barriers in trade, technology, and capital flows. “These emerging sources of shocks are often inadequately captured in existing macroeconomic models,” he remarked, signalling the need for more dynamic policy tools.

In summing up, Das struck a nuanced note: “While climate change and geopolitical tensions may exert supply shocks that stoke inflationary pressures and slow global growth, technological innovation and artificial intelligence, if properly managed, could enhance productivity and reduce costs.” The net impact, he stressed, hinges on central banks’ ability to harness technology’s benefits while managing associated risks, ultimately shaping the 21st-century financial landscape.

He reiterated the crucial interplay between price stability and financial stability, noting recent global crises that illustrate the fine balance central banks must maintain. He warned that monetary expansion, if not reined in, could jeopardise price stability, while effective regulation of banks and markets could reinforce monetary transmission mechanisms. “The trade-off between price stability and growth is a complex one, often necessitating a careful calibration of monetary, macroprudential, and micro-prudential tools,” he observed.

Governor Das concluded by highlighting the importance of monetary-fiscal coordination, especially in times of crisis. He cited the pandemic response, where central banks worked in tandem with governments to navigate the unprecedented turbulence, as a model of effective crisis management. This cooperative approach, he suggested, may be pivotal in addressing the multifaceted challenges that lie ahead for central banks.