In a pivotal keynote address at the RBI's 90th anniversary conference in New Delhi, RBI Governor Shaktikanta Das raised significant concerns regarding the increasing risks posed by artificial intelligence (AI) in the financial sector. He pointed out that while technological advancements like AI and machine learning (ML) offer new avenues for business growth and profit, they also introduce critical financial stability risks. This dual nature of technology necessitates a careful examination of its implications on the economy.

Das articulated that heavy reliance on AI could lead to concentration risks, especially if a limited number of technology providers dominate the market. This scenario could amplify systemic vulnerabilities, as failures in AI systems may lead to widespread disruptions across the financial sector. “AI's opacity makes it difficult to audit or interpret the algorithms which drive decisions,” he stated, cautioning that this could result in unpredictable market consequences. Financial institutions must, therefore, implement robust risk mitigation measures to navigate these challenges effectively.

The Governor also delved into the broader economic landscape, emphasizing the global debt surge, which has significant implications for monetary policy and financial stability. He pointed out that central banks, in recent times, have transformed their roles, shifting from being the "lender of the last resort" to becoming the "lender of the first resort" to support distressed economies. While these interventions were crucial in averting deeper economic crises, Das warned that the prolonged era of ultra-low interest rates has exposed several unforeseen risks. “The limits and downsides of easy monetary policy in protecting economic activity during crises have become evident,” he remarked.

Das highlighted the alarming fact that global public debt reached 93.2% of GDP in 2023 and is projected to hit 100% by 2029, according to the International Monetary Fund (IMF). He warned that the combination of high public debt and fiscal imbalances could undermine macroeconomic stability, particularly in emerging economies. “The debt overhang is simmering underneath the radar of central banks, threatening to un-anchor inflation expectations,” he noted, underscoring the necessity for vigilant monitoring and management of debt levels.

Moreover, Das pointed to the divergent monetary policies being adopted across various countries, which may lead to volatility in capital flows and exchange rates. He recalled how the sharp appreciation of the Japanese Yen in early August triggered disruptive reversals in the Yen carry trade, impacting global financial markets. This divergence in monetary policy, characterized by easing in some economies and tightening in others, presents new challenges for central banks worldwide.

Das characterized the current period as a "watershed" moment for central banks, navigating “uncharted terrain” marked by inflation, public debt, and the need for policy changes amid rising geo-economic tensions. He expressed that for the first time in centuries, central banks face a future where their mandates, functions, and performances are subject to intense scrutiny.

Reflecting on the importance of technology and digitalization in banking, Das acknowledged the digital revolution in the payments sector. He highlighted India’s achievements with its real-time gross settlement (RTGS) system and Unified Payments Interface (UPI), which have significantly improved cross-border payments. "India has developed a world-class digital public infrastructure, which has facilitated the development of high-quality digital financial products," he stated.

Das further illustrated India’s vibrant startup ecosystem, which boasts over 140,000 recognized startups, more than a hundred unicorns, and over US$150 billion in funding raised. He urged that India’s experiences in digital public infrastructure could serve as a model for other nations aiming to enhance their financial systems.

In light of these pressing issues, Das underscored the critical role that central banks play in ensuring financial stability. While price stability has gained prominence as a goal, he asserted that financial stability remains the core reason for the existence of central banks. Recent global banking crises and volatility in financial markets reinforce the need for a balanced approach to inflation control and market security.

As we navigate through these complex challenges, it is vital for readers and investors to stay informed about the developments impacting the financial landscape. For more insights into the latest economic indicators and news, visit the Best IPO to Apply Now for updates on latest IPOs and market trends, and check the Top News Headlines for comprehensive coverage of business and economic news.

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