In a keynote address at the RBI@90 High-Level Conference in New Delhi, Reserve Bank of India (RBI) Governor Shaktikanta Das outlined the critical challenges and transformations facing central banks globally in the aftermath of the COVID-19 pandemic and ongoing geopolitical tensions. Titled “Central Banking at Crossroads”, Das’s speech provided an in-depth reflection on how central banks, including the RBI, are navigating an increasingly complex and uncertain economic environment.
A New Era for Central Banking
Das began by emphasizing the unprecedented scrutiny central banks face today, as they grapple with challenges from geo-economic fragmentation, disruptive industrial and financial policies, technological innovations, and the looming threat of climate change. He described the current period as a “watershed moment” in the evolution of central banking, where both known and unknown risks must be managed.
Central banks, he said, are now operating in a “twilight zone,” with their traditional mandates and functions being redefined as they strive to maintain financial stability amid this new landscape. The RBI’s journey, which marks its 90th year, reflects India’s broader developmental aspirations, with many milestones linked to India’s progress as a nation.
Three Pillars: Monetary Policy, Financial Stability, and New Technologies
The governor focused on three key areas that will shape the future of central banking:
- Monetary Policy:
Das reviewed the significant evolution in monetary policy since the 1970s, particularly in response to the Global Financial Crisis (GFC) and the COVID-19 pandemic. Central banks transitioned from being “lenders of last resort” to “lenders of first resort,” lowering interest rates and implementing unconventional policies to support the economy. However, he acknowledged the “downside” of such policies, noting that while they provided essential support during crises, they have had lasting distributional consequences, with some central banks now facing “negative equity” and threats to their independence.Another pressing issue is the surge in global public debt, which stood at 93.2% of GDP in 2023 and is projected to reach 100% by 2029. This debt burden, exacerbated by pandemic-related fiscal stimuli, is creating constraints on monetary policy. For emerging market economies (EMEs) like India, the impact of global monetary policies, especially those in systemic economies, remains a challenge due to spillovers into capital flows and inflation.
- Financial Stability:
Financial stability, Das noted, remains the core reason for the existence of central banks. He pointed out the growing risks resulting from the ultra-low interest rate policies of recent years, which led to excessive risk-taking and the inflation of financial asset prices. The aggressive tightening of monetary policies in response to inflation surges, particularly following the Ukraine war, has heightened risks, culminating in banking crises in March 2023 and market sell-offs in 2024.Emerging risks, such as the divergence in global monetary policies and the expansion of under-regulated private credit markets, have added layers of complexity to maintaining financial stability. The rising cost of debt servicing and stressed asset valuations, particularly in commercial real estate, pose further threats, especially for smaller banks with significant exposure.
- New Technologies:
The governor also highlighted the technological revolution, particularly in the payments space, as a major development. India’s progress in real-time payment systems and its world-class digital public infrastructure (DPI) has placed it at the forefront of global digital finance. Cross-border payments, driven by increasing worker remittances and international e-commerce, offer significant potential for improvement in efficiency and cost reduction.India’s central bank digital currency (CBDC) is another groundbreaking initiative that Das highlighted, noting that India is among the few countries to have launched both wholesale and retail CBDCs. These digital currencies have the potential to streamline cross-border payments and enhance financial inclusion, especially in underserved areas. However, he also emphasized the importance of harmonizing global standards to address the risks posed by cryptocurrencies and ensure financial stability.
Emerging Financial Stability Risks
Das identified several emerging risks to global financial stability, including the rapid expansion of private credit markets with limited regulation, rising debt servicing costs due to higher interest rates, and stretched asset valuations. He warned that corrections in certain asset markets, such as commercial real estate, could trigger contagion across the financial system. Moreover, the increased use of artificial intelligence (AI) in financial services, while offering new opportunities, also presents challenges such as concentration risks and vulnerability to cyberattacks.
A Successful Decade for Central Banking
Despite the challenges, Das concluded by affirming that central banks have largely succeeded in maintaining monetary and financial stability in the current decade. He noted that inflation has been brought closer to targets and major financial collapses have been averted. Going forward, central banks must remain vigilant and resilient as they continue to navigate complex and evolving risks.
With technological innovation at the core of future financial systems, central banks, including the RBI, are driving advancements through sandboxes, innovation hubs, and hackathons to remain at the cutting edge of global finance.
Conclusion
Das’s speech at the RBI@90 conference underscored the critical role of central banks in safeguarding financial stability and navigating the transformative challenges of the 21st century. As central banks confront the dual pressures of emerging risks and technological innovation, their ability to adapt and strengthen policy frameworks will determine the stability of the global financial system in the coming years.
