The Reserve Bank of India (RBI) on Friday warned 2023 would be a challenging year for central banks as they would find it difficult to gauge when to pause and ease on policy rates.

In its article on “State of the Economy”, that is part of the February 2023 bulletin, the central bank said the heaviest drag from the tightening of monetary policies through 2022 is yet to grip the economy.

“A global economy on the cusp of recession remains unpredictable. The worst of their (central banks) fears can come true if indeed global growth slows but inflation remains elevated. The year 2023 will probably be characterised by a milder global slowdown than earlier anticipated but the trajectory remains unpredictable,” the article said.

On the conditions in India, the article prepared by its authors that included deputy governor Michael D Patra, said domestic consumption and investment stand to benefit from stronger prospects in agricultural and allied activities.

Strengthening business and consumer confidence and strong credit growth will help the economy. The article said supply responses and cost conditions are poised to improve even though inflation witnessed are bound in January. Meanwhile, the RBI announced the final guidelines on Interest Rate Risk in Banking Book (IRRBB), which is the current or prospective risk to banks’ capital and earnings arising from adverse movements in interest rates.

The regulator said that excessive IRRBB can pose a significant risk to banks’ current capital base or future earnings. Given such an impact, its norms now require banks to measure, monitor, and disclose their exposure to IRRBB.