Reserve Bank of India's Economic Capital Framework Review
The central board of directors of the Reserve Bank of India (RBI) recently reviewed the Economic Capital Framework (ECF), which is crucial for determining risk provisioning and surplus distribution to the government.
Significance of the ECF
- The ECF helps in determining the dividend transferred by the RBI to the government annually.
- For the accounting year 2024-25, it is estimated that the RBI might transfer Rs 2.5 lakh crore to Rs 3 lakh crore to the government, setting a new record.
- In the previous year, 2023-24, the RBI had already set a record by transferring Rs 2.11 lakh crore.
- This transfer aids the government in fiscal deficit management and enhances liquidity within the system.
Contingency Risk Buffer (CRB) and Earnings
- The CRB is a reserve for financial crises, maintained because of the RBI's role as Lender of Last Resort (LoLR).
- In FY25, RBI's robust earnings were due to dollar sales to manage rupee volatility and increased values of gold and government securities.
Historical and Projected Surplus Transfers
- In 2022-23, the dividend was Rs 87,416 crore; in 2021-22, it was Rs 30,307 crore, the lowest in a decade.
- Previous significant transfers include Rs 99,122 crore in FY2021 and Rs 57,128 crore in 2019-20.
- High banking liquidity, projected at Rs 6 lakh crore, could spur a rally at the short end of the curve.
Bimal Jalan Committee Recommendations
- Established in November 2018, the committee recommended periodic reviews of the ECF every five years.
- It suggested maintaining the CRB between 5.5% to 6.5% of the RBI's balance sheet.
