No more ‘neutral’

Shaktikanta Das, Governor of the Reserve Bank of India (RBI), in his statement on the Monetary Policy Committee report released on April 5, said: “Two years ago, around this time, when CPI [consumer price index] inflation had peaked at 7.8 per cent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis. In other words, it is essential, in the best interest of the economy, that CPI inflation continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished.”

In its latest report, RBI says that despite all parameters showing positive trends on inflation trajectory, food price uncertainties (read high food prices) are causing high overall inflation. And the erratic weather is the reason why food supply is being disrupted, adding to the high price rise. “Frequent and overlapping adverse climate shocks pose key upside risks to the outlook on international and domestic food prices,” Das said, adding that increasingly central banks across the world are factoring climate into monetary policies. The metaphorical “elephant”, thus, is not just inflation but also climate change. It is well accepted that weather is a key determinant in the food production cycle. But the RBI Governor’s statement is a convincing pointer to the centrality of erratic climate in the contemporary economy. To regulate inflation—the “task”, like he has mentioned—there must be certainty of food production (as per expected quantity) to meet the demand. But the climate change-induced erratic weather shocks are having wide impacts on countries.

“The after-effects of climate change might weaken the transmission of monetary policy actions to financing conditions faced by households and firms,” warns the RBI’s Monetary Policy Report 2024. An agricultural household losing income due to erratic weather events will be spending less as well. If the shock is regular, the overall income will also decline proportionately, pushing the household into poverty. This, in turn, will precipitate poverty among those who depend on agriculture and other related vocations that interact with climatic situations more directly. This is true not just for an agricultural household but also for countries that are predominantly agrarian.

The World Bank’s recent report, “The Great Reversal: Prospects, Risks, and Policies in International Development Association Countries”, estimates that 75 countries—poor and least developed countries, mostly “eligible for grants and zero to low-interest loans from the World Bank’s International Development Association (IDA)—lose, on average, 1.3 per cent of their GDP annually due to natural disasters. And the losses are increasing while the number of extreme weather events has doubled in the last decade. More than one-fifth of the population in these countries was living in extreme poverty in 2023, which is over 800 per cent of the average in the rest of the world. These countries had 651 million food-insecure populations in 2023, which is nearly double of the figure for 2019. While the report attributes many other factors to the static development in the IDA countries, climate change-related losses and challenges have been identified as add-ons to this dire situation. This is because most of their economy is agrarian, and, thus, highly vulnerable to climatic shocks. What these assessments bring out is widely expected. But climate change entering the realm of formal economic policy-making, that too of central banks’, is an acceptance of the crisis as well as a warning of how it could disrupt the global economy. DTE

Views expressed are personal