Climate Risk & Central Banking: The RBI’s Role In Incentivising Green Finance
- IJLLR Journal
- Apr 29
- 1 min read
Chelsy Mehta & Yashwant Manothiya, National Law Institute University, Bhopal
ABSTRACT
Climate change has evolved from a distant ecological concern into a defining macroeconomic challenge, forcing a historic paradigm shift in global central banking. This paper examines the evolving regulatory posture of the Reserve Bank of India (RBI) as it navigates the “Tragedy of the Horizon” and the emergence of “Green Swan” events, systemic financial risks that traditional, backward-looking risk models are unequipped to price. India faces a unique dual-front challenge: extreme vulnerability to physical climate shocks and a massive $10 trillion capital requirement to achieve its 2070 net-zero transition. Utilizing a doctrinal method of study, this paper analyzes the RBI’s transition from “moral suasion” to a structured, enforceable regulatory framework. Key interventions discussed include:
The inclusion of renewable energy under Priority Sector Lending (PSL).
The 2023 Green Deposits Framework designed to mitigate greenwashing.
The landmark 2025 Master Directions on Climate Finance, which integrated climate risk into core banking strategy and governance.
The study further explores the ‘climate-risk paradox’, where the need for rapid decarbonization must be balanced against the risks of greenflation, data deficits in Scope 3 emissions, and the socio-economic necessity of a just transition for a fossil-fuel-dependent economy. The paper concludes by recommending the formalization of a National Climate Taxonomy and a dedicated Transition Finance framework to ensure that the brown economy has the financial runway to adopt cleaner technologies without triggering systemic instability.
Keywords: RBI, Green Finance, Climate Risk, Green Swan, Transition Finance, Priority Sector Lending (PSL), Net-Zero 2070.
