Revised Economic Capital Framework of the Reserve Bank
The Reserve Bank of India (RBI) has recently updated its Economic Capital Framework (ECF). This revision aims to provide the central bank with enhanced flexibility in managing surplus transfers to the government. This approach ensures that fiscal stability is maintained even in volatile economic conditions. The new framework allows for a contingency risk buffer (CRB) range of 4.5-7.5 per cent, expansion from the previous 5.5-6.5 per cent range.
Surplus Transfer to Government
In a remarkable move, the RBI’s central board approved a surplus transfer of approximately ₹2.69 trillion to the government for the fiscal year 2024-25. This transfer occurred despite maintaining the CRB at the upper limit of 7.5 per cent. The surplus was boosted by the RBI’s robust earnings from foreign exchange transactions. The gross dollar sales dramatically increased from $153 billion in FY24 to $399 billion in FY25.
Earnings and Asset Management
The RBI’s earnings have seen a substantial rise due to increased interest income from government securities. Additionally, lower provisioning for revaluation losses on assets contributed to this growth. The central bank is likely benefiting from mark-to-market gains on both foreign and domestic asset holdings. This financial strategy has enabled the RBI to manage its balance sheet effectively while ensuring a healthy surplus transfer.
Historical Context of the CRB
The CRB has undergone several adjustments over the years. From FY19 to FY22, the RBI maintained a CRB of 5.50 per cent. In FY23, it increased to 6 per cent, and further to 6.5 per cent in FY24. The recent increase to 7.5 per cent is a response to exceptional economic conditions. This flexibility allows the RBI to adjust the CRB based on the prevailing economic environment, ensuring stability in surplus transfers.
Recommendations and Future Outlook
The revised ECF was adopted based on recommendations from an expert committee led by former RBI governor Bimal Jalan. This committee suggested regular reviews of the framework every five years. The RBI aims to strengthen the ECF to better align with emerging risks. This proactive approach is crucial in maintaining a resilient balance sheet amid global economic uncertainties.
Economic Implications
The adjustments to the ECF are designed to ensure that the RBI can respond effectively to changing economic conditions. This flexibility is particularly important in uncertain environments where previous surplus transfers have varied . For instance, the transfer of ₹2.1 trillion in FY24 was the highest ever, while the ₹30,000 crore transfer in FY22 was the lowest in over a decade. The broad CRB range allows the RBI to navigate these fluctuations more adeptly.
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