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Context:

The Reserve Bank of India (RBI) is conducting a review of its Economic Capital Framework (ECF).

Details

The Reserve Bank of India (RBI) is reevaluating its Economic Capital Framework (ECF), a policy that specifies how the central bank manages its financial reserves, risk provisioning, and surplus transfers to the government.

The review is being conducted by an internal committee, and its recommendations will guide the RBI’s decisions on maintaining the Contingency Risk Buffer (CRB) and surplus distribution.

What is the Economic Capital Framework (ECF)?

The ECF is a framework that outlines how the RBI allocates its financial resources, including:

• Risk Provisions: Funds set aside to address unforeseen economic crises.
• Surplus Transfers: Profits transferred to the central government under Section 47 of the RBI Act, 1934.
• Contingency Risk Buffer (CRB): A reserve maintained to safeguard against financial instability, ensuring the RBI can act as the Lender of Last Resort (LoLR) during crises.

The Bimal Jalan Committee, formed in 2018, recommended that the CRB should be maintained between 5.5% to 6.5% of the RBI’s balance sheet. The committee also suggested that the ECF be reviewed every five years.

During the pandemic (FY19–FY22), the RBI maintained a CRB of 5.5% to support economic growth, increasing it to 6% in FY23 and 6.5% in FY24.

Current Status of the CRB

As of March 31, 2024, the RBI’s CRB stands at 6.5% of its balance sheet, the upper limit of the recommended range. The central bank has adhered to the Bimal Jalan Committee’s guidelines since 2019, but with the five-year review cycle ending in June 2024, the RBI is now assessing whether any adjustments are needed.

Impact of the ECF Review

Surplus Transfers to the Government: The RBI’s surplus transfers play a crucial role in supporting government revenue and fiscal policies.

• In 2023-24, the RBI transferred a record surplus of ₹2.11 lakh crore to the government, even after maintaining a CRB of 6.5%.
• Any increase in the CRB could reduce the surplus available for transfer, while a decrease could free up more funds for the government.

Economic Stability: The CRB acts as a financial safeguard against global instability, banking crises, and currency fluctuations.

• A higher CRB would strengthen the RBI’s ability to respond to economic shocks but may limit funds for government spending.
• A lower CRB could provide the government with more resources but may increase financial risks.

Government Budget Planning: Changes to the ECF could impact the government’s budgetary planning, especially for infrastructure projects and social welfare programs.

• A reduction in surplus transfers could weaken fiscal deficit management, while an increase would provide more fiscal flexibility.

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Source: 

BUSINESS-STANDARD