Publisher: Observer Research Foundation

Chapter: The Central Bank’s Role in Energy Transition

The chapter discusses the evolving role of central banks, particularly the Reserve Bank of India (RBI), in addressing climate change risks and supporting energy transition. It explains how central banks are developing frameworks to manage three types of climate risks: transition, physical, and liability risks, with 127 central banks now participating in the Network for Greening the Financial System (NGFS). The chapter details RBI’s specific initiatives, including the establishment of a Sustainable Finance Group and upcoming regulatory guidelines on climate risk and sustainable finance, highlighting India’s need for over US$10 trillion to reach its net-zero target by 2070. It outlines specific monetary policy tools RBI can utilize, such as adjusting the Statutory Liquidity Ratio (SLR) collateral framework and modifying external commercial borrowing (ECB) norms to encourage green financing. The chapter concludes by suggesting innovative uses of foreign exchange reserves for clean energy infrastructure and emphasizes the critical role central banks must play in facilitating a smooth transition to clean energy while maintaining financial stability.