For RBI Grade B Exam Interview
Reference: Remarks of Shri M. Rajeshwar Rao, Deputy Governor Panel Discussion on Climate Implications for Central Banking (Organised by the IMF and Center for Social and Economic Forum on Wednesday, July 19, 2023 at New Delhi)
What are some of the risks posed by Climate change on Indian economy?
Rising global temperatures, extreme weather events, changing weather patterns, and ecosystem degradation are posing serious threats to lives and livelihoods. For instance, extreme weather events like storms or floods can disrupt production and supply chains, leading to shortages of essential goods and services and consequent inflationary pressures. Additionally, climate-induced changes in rainfall patterns can impact crop yields, causing uncertainty in agricultural produce prices for both producers and consumers.
How do climate risks impact macroeconomic outcomes? What are the challenges faced by Central banks in this regard?
Climate risks impact macroeconomic outcomes through two primary channels - physical risks and transition risks. Physical risks are direct outcomes of climatic events, such as wildfires, storms, and floods. These events can lead to widespread damage, disruption of economic activities, and loss of livelihoods. On the other hand, transition risks arise from the process of adjusting towards reducing the emission intensity of the economy. Such transitions can lead to shifts in asset prices, making carbon-intensive assets less attractive to investors, while driving up the prices of green assets disproportionately. This could result in financial market volatility and affect economic stability.
Central banks face several challenges in managing these climate risks. One key challenge lies in accurately measuring and quantifying the consequences, intensity, severity, and frequency of climate events, which can be complex and unpredictable. The impact of these events on banks and financial institutions is equally challenging to assess. Additionally, the transboundary nature of climate risks makes global coordination and cooperation essential for effective risk management.
What do you mean by the term "greenwashing"?
"Greenwashing" refers to the deceptive practice of portraying financial activities or investments as environmentally friendly or sustainable when, in reality, they do not meet genuine green criteria. This practice misleads investors and the public into believing that these activities are contributing to environmental protection and sustainability, while they may have minimal or no positive impact. As a result, regulatory interventions are necessary to ensure that what is being projected as 'green' genuinely aligns with sustainability goals.
What are green bonds?
Green bonds are an innovative financial instrument used to raise capital specifically for climate and environmental projects. The proceeds from these bonds are invested in initiatives that promote sustainable development, such as renewable energy projects, green infrastructure, or environmentally friendly technologies. Green bonds play a vital role in mobilizing private investment towards climate projects and facilitating the transition to a low-carbon economy.
What are sovereign green bonds?
They are the green bonds issued by the Government.
What are green deposits?
Green deposits refer to a specific type of deposit offered by financial institutions that align with sustainable and environmentally friendly principles. These deposits are aimed at encouraging individuals and businesses to contribute to green initiatives and sustainable projects. The funds raised from green deposits are then utilized by banks or financial institutions to finance environmentally responsible activities, such as renewable energy projects, clean technology ventures, eco-friendly infrastructure, and other initiatives that promote a transition to a low-carbon and sustainable economy. By opting for green deposits, depositors can actively support environmental conservation and contribute to efforts addressing climate change while earning a return on their deposits.
What are the steps taken by RBI against the risks posed by climate change?
The Reserve Bank of India (RBI) has been actively taking measures to address the risks posed by climate change. Initiatives include incorporating finance to renewable energy projects in Priority Sector Lending (PSL) portfolio of banks, supporting the issuance of sovereign green bonds, and working on guidance for acceptance of 'Green Deposits.' The RBI has also been engaging in discussions and seeking feedback from stakeholders to elicit views and insights on addressing climate-related financial risks effectively.
What is the way forward?
The way forward demands a holistic and coordinated effort to manage the impacts of climate change. Tackling climate risks will require collaboration between central banks, financial institutions, governments, and civil society organizations. Capacity building efforts will be vital to equip stakeholders to understand, assess, and plan for climate issues and related financial risks. Moreover, global cooperation and collective action are crucial to address the systemic impact of climate change on the economy and the financial system effectively. Fulfilling climate finance commitments, particularly from advanced economies, is essential to support sustainable development goals and bridge the financing gap for climate-related initiatives.
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