Inaugural Himalaya Shumsher Memorial Lecture Highlights Central Banking Evolution and Challenges

The speaker expresses gratitude for the opportunity to deliver the inaugural Himalaya Shumsher Memorial Lecture, honoring Himalaya Shumsher Rana, the first governor of Nepal Rastra Bank (NRB), who significantly contributed to Nepal’s monetary and financial systems from 1956 to 1961. The speaker emphasizes the longstanding relationship between Nepal and India, highlighting the close ties between the NRB and the Reserve Bank of India based on cooperation.

The talk centers on the evolving role of central banks in the 21st century, particularly in light of recent global challenges. Central banks are recognized as essential guardians of macroeconomic stability and have faced numerous crises, including the COVID-19 pandemic and geopolitical conflicts. The speaker outlines a framework for the lecture, which will explore the historical principles of central banking, the lessons learned from recent crises, and future challenges.

Key points include:

1. Established Paradigm: By the end of the 20th century, central banking was defined by three principles: prioritizing price stability, the debate between rules and discretion in policy-making, and the independence of central banks, which must balance accountability and transparency.

2. Evolving Paradigm: The 21st century has introduced complexities like financial crises, pandemics, and inflation spikes, prompting central banks to reassess their roles. Key lessons highlight the interconnectedness of price and financial stability, the need for broader mandates that encompass sustained growth, and the importance of multiple instruments in achieving economic stability.

3. Communication and Coordination: Effective communication has become crucial in managing public expectations, while monetary-fiscal coordination has proven vital during crises, as seen in collaborative efforts to combat inflation.

4. Emerging Market Resilience: Emerging market economies (EMEs) have shown improved resilience against global shocks, learning from past experiences. Strengthening economic fundamentals is identified as key to managing future challenges.

5. Indian Context: The Reserve Bank of India’s holistic approach, which balances price stability with financial stability, has enabled it to navigate recent economic challenges effectively. The Flexible Inflation Targeting framework allows for adaptability in response to changing economic conditions.

The speaker concludes by reflecting on the new challenges central banks will face in the 21st century, emphasizing the need for continued evolution and adaptation in central banking practices.