Monetary policy is an adjustment of the supply of money in the economy by the Reserve Bank of India(RBI) to achieve a combination of inflation and output stabilization.

Climate change effects on monetary policy

• Directly impacts inflation through adverse weather events affecting agricultural production and global supply chains. 
• Impact the Natural Rate of Interest (NRI) due to increasing temperatures and occurrence of Extreme weather events undermining productivity and lowering potential output. 
  • NRI is a real short-term interest rate consistent with output at its potential and a stable rate of inflation.
    • It is one element which helps to define the monetary policy stance (accommodative, neutral or restrictive).
• Impact the financial health of banks and other financial institutions, the value of assets, and the economic expectations of individuals and businesses. 

Way forward

• Adopting green taxonomy, which is a framework to assess the sustainability credentials and possible ranking of economic activity.
• Need to incorporate climate risk into their modeling frameworks used for monetary framework.