The share of Asian central banks and supervisory authorities adopting big data and machine learning has risen to 86 per cent. This involves nowcasting exercises, applications to granular financial data, and suptech/regtech applications such as the computation of the economic policy uncertainty (EPU) indices in India.

An important area is fraud detection, with data reflecting that one-third of Asian central banks deploy big data algorithms for anti-money laundering/combating terrorism financing purposes, RBI Deputy Governor Michael Patra said, quoting a survey.

“Machine learning has also been extensively used in Asia for research purposes to inform monetary policy decisions, facilitate data management, and support regulatory supervision,” Patra said as part of his address at the 59th SEACEN Governors’ Conference on February 15. The RBI released the text of the speech on Tuesday.

Other applications include using text analysis to evaluate monetary policy credibility, ensuring consistency in central banks’ communication of supervisory issues to financial institutions, improving efficiency in the compilation of statistics, assessing the state of the labour market or of trade conditions, extracting information on tourism activities, and capturing firms’ sentiment or evaluating employees’ feedback.

Growing interest in digital forms of payments worldwide has also led SEACEN central banks to explore the possibilities of central bank digital currency (CBDC), which is currently in various stages of experimentation in different member countries.

“The overarching goal for developing CBDC as digital cash among the SEACEN central banks appears to be to create a resilient payment system for consumers and businesses to transact in any situation. SEACEN central banks are actively coordinating their efforts to develop CBDCs, with near real-time exchanges of information on progress,” he said.

Inflation vs growth

Citing a working paper from the SEACEN centre, Patra said estimates suggest that the sacrifice ratio — the loss of output to achieve a reduction in inflation by one percentage point — is between zero and 0.5 per cent of GDP, even as the extent of contraction in output was widely divergent across member economies.

“Asia will likely contribute about two-thirds of global growth in 2024, a carryover of its blockbuster performance in 2023. Disinflation is expected to remain on track in Asia, and convergence with central bank targets is being sighted. Thus, the outlook for Asia in a stormy and unsettled global environment is one of sustained growth with stability,” Patra said.

As a result, the region is a preferred habitat for international financial flows on the back of positive growth differentials vis-à-vis the rest of the world, deep and vibrant financial markets, and reasonable stability in financial asset prices.

On the other hand, global spillovers from geopolitical developments, geo-economic fragmentation, and the tightening of financial conditions as a result of aggressive and synchronised monetary policy tightening worldwide have imposed downward pressures on currencies in the region, resulting in a widening of risk spreads and reversals of portfolio equity and debt flows.

Capital inflows to SEACEN member economies more than doubled from an average of $400 billion in 2000-2010 to over $900 billion in 2011-2021. The volatility of capital inflows into SEACEN economies declined between 2000-2010 and 2011-2021. However, the variability of portfolio equity, trade credit, and advance flows rose, leading to a need for varied responses, he added.

As such, changing workforce demographics, the rise of financial products and services beyond the conventional definition of banking, digitalisation, climate change, talent shortages, and persistent supply shocks, apart from the pandemic and the recent inflation experience, will continue to pose challenges.

Patra also touched upon the fact that climate change poses a common and potentially overwhelming macrofinancial risk for all SEACEN member countries, given the alarming rise in the incidence and intensity of extreme weather events in recent years.