Shaktikanta Das: Central banking in the 21st century - changing paradigm

Himalaya Shumsher Memorial Lecture by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at the Nepal Rashtra Bank, Kathmandu, 24 September 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

I am delighted to have been invited by the Nepal Rashtra Bank (NRB) to deliver the inaugural Himalaya Shumsher Memorial Lecture. I deem it as a privilege. I place on record my appreciation of the Nepal Rashtra Bank for initiating this lecture series in honour of Shri Himalaya Shumsher Rana, the first governor of NRB from 1956 to 1961. He contributed immensely to the development of Nepalese monetary and financial systems. His efforts laid the foundation for many of Nepal's key financial institutions and contributed significantly to the country's economic development. Nepal and India have enjoyed a long standing relationship that goes back into history. It is not just a relationship between the two countries, it is also a close people to people relationship. The Nepal Rashtra Bank and the Reserve Bank of India also share a close relationship based on mutual co-operation.

Central banks have traditionally functioned as the guardians of macroeconomic and financial stability. In recent years, central banks were at the forefront protecting their economies and financial systems from the onslaught of multiple global shocks. They were put to ultimate test in this extraordinary period of global turbulence and uncertainties. They had to change gear to revive their COVID-19 pandemic-ravaged economies to waging an all-out war against inflation in quick succession. Many standard central banking theories and practices were debated; and while some survived, others had to adapt to the new realities. As we still transit through this challenging period which is now dominated by geopolitical conflicts and global geoeconomic fragmentation, it would be appropriate to examine how central banking has evolved over the years, draw lessons from the past crises, and prepare for the challenges that lie ahead in the 21st century. Today, therefore, I have chosen to speak on "Central Banking in the 21st Century: Changing Paradigm".

I have structured my talk in the following manner. First, I propose to speak on the established paradigm of central banking at the turn of the last century. Thereafter, I would like to describe how this paradigm has evolved, learning from the crisis experiences of the 21st century, followed by brief remarks on the Reserve Bank's approach to policymaking that has helped the Indian economy emerge stronger in the last few years. Finally, I shall attempt to outline some of the challenges that central banks will confront in the 21st century.

The Established Paradigm at the Turn of Last Century

By the end of the 20th century, the theory and practice of central banking had converged to certain core principles. The first of these core principles was that price stability would be the primary responsibility of a central bank. This principle had its origin in the Great Inflation of the 1970s. Subsequently, inflation targeting as a monetary policy framework gained prominence from the early 1990s, both in advanced and emerging market economies (EMEs). The second core principle had its roots in the famous 'rules versus discretion' debate in macroeconomics of the 1970s and 1980s, following which a consensus emerged in favour of rules or constrained discretion in policy making. This was followed by institutional reforms under which inflation targeting got embedded in rule-based policy making with some flexibility. The third core principle was about central bank independence which was considered as critical for achieving the goals of price and economic stability. While the target was given to the central bank by elected representatives, the central bank was free to deploy instruments at its disposal to achieve the given target. Central bank independence went hand in hand with increased accountability and transparency of the monetary policy decision making process.