RBI’s crucial role in energy transition

RBI’s crucial role in energy transition

Subject: Economy

Section: Monetary policy and Banking

RBI’s recent report highlights its key role in mitigating the risks of transitioning to a low-carbon economy. With India’ needing approximately $10 trillion by 2070 meet it’s net-zero target, need to address the climate change risks that can impact the financial system’s stability and the broader economy. The report proposes several measures to attract investments for expediting India’s energy transition:

• Prudential regulations
  • A new scheme to lower borrowing costs for renewable energy firms by extending priority sector lending and providing low-cost funds to banks.
  • Accepting Sovereign Green Bonds as collateral.
  • Offering more flexibility in margin requirements, thus making loans cheaper.
• Monetary policy measures:
  • RBI can allow Statutory Liquidity Ratio (SLR) to cover green financing bonds. Currently, only State and central government debt are SLR-eligible.
• Other Measures:
  • RBI can establish the Counter Cyclical-Climate Buffers (Basel III norms introduced capital buffers for banks, namely the capital conservation buffer and countercyclical capital buffer(CCyB)) RBI has implemented the capital conservation buffer, the CCyB is pending.
  • RBI can ease the External Commercial Borrowing (ECB) norms to draw foreign investment in India’s clean energy sector.
  • Recognising the sector as a separate industry and relaxing sectoral caps, the RBI can allow borrowers to raise funds beyond the current $750 million per year limit on External Commercial Borrowings (ECB).
  • Creating a dedicated hedging pool for clean energy companies borrowing through ECBs can make investing in green projects more attractive and financially feasible. (Companies borrowing through ECB are required to maintain a hedge against the forex exposure, RBI’s optimal hedge ratio requires 63% of ECB exposure to be hedged.)
  • RBI can use some of its $580 billion forex reserves for risk mitigation initiatives like currency hedging subsidies and credit guarantees.