RBI report highlights 3 ways in which climate change can increase inflation and hinder growth in India

Climate change poses an escalating challenge in the 21st century, marked by rising temperatures and a surge in extreme weather events. The cascading impacts of this global crisis are particularly impacting developing economies and societies like India and Africa.

Now, the Reserve Bank of India (RBI) has cautioned that the climate-driven impacts may present frequent shocks to inflation, thereby undermining policy transmission and necessitating more stringent monetary measures.

In its new monetary policy report, RBI has highlighted three critical pathways through which climate change could exacerbate inflation and hinder growth in India. These are as follows:

1. Adverse weather conditions could disrupt agricultural production and global supply chains, leading to inflationary pressures.
   
2. Escalating temperatures and extreme weather events could alter the natural interest rate, dampening productivity and potential output.
   
3. The aftermath of climate change might impede the effectiveness of monetary policy in regulating financing conditions for households and businesses.
   

The report underscores the growing trend among central banks to explicitly integrate climate risks into their modelling frameworks. It emphasises that a decline in productivity could lead to a drop in the natural interest rate. However, even with a lower natural rate, sudden spikes in inflation may prompt the central bank to adopt a tighter monetary stance.

RBI Governor Shaktikanta Das reiterated concerns about the risks posed by global warming in his policy statement on Friday, emphasising the potential for frequent climate shocks to drive up both international and domestic food prices.

During the post-policy press conference, Governor Das also referenced the India Meteorological Department's (IMD) forecast for 2024, which predicts above-normal maximum temperatures during the hot weather season from April to June across most of the country.

"Wheat is not much concern (since the harvesting is complete in most parts of the country). But, vegetable prices have to be watched and any other impact that the heatwave may produce," Das added.

Meanwhile, IMD chief Mrutyunjay Mohapatra has stressed the importance of considering weather conditions and climate factors in another crucial aspect: elections.

With discussions on the ‘one nation, one poll’ concept, which proposes the idea of simultaneous Lok Sabha and State elections, authorities have been urged to factor in weather and climate considerations. These remarks come amid preparations for potentially scorching weather during the general election, prompting the IMD to provide specialised forecasts to aid authorities in better preparation.