RBI Board Puts Economic Capital Buffer Under the Microscope: Five-Year Review Could Shape Future Surplus Transfers

Image Source: Vajiram & Ravi

The Reserve Bank of India (RBI) has initiated a comprehensive review of its Economic Capital Framework (ECF), a pivotal policy that governs how the central bank manages its capital reserves, risk provisioning, and the transfer of surplus funds to the government. This review, mandated every five years as per the Bimal Jalan Committee’s recommendations, comes at a time when RBI’s capital adequacy and financial resilience are under heightened scrutiny.

Key Highlights:

Five-Year Mandate: The review follows the Bimal Jalan Committee’s guideline that the ECF should be reassessed every five years to ensure it remains robust and responsive to evolving economic conditions. The current framework, adopted in 2019, is now due for evaluation as its term concludes in June 2024.
Contingency Risk Buffer (CRB): The ECF stipulates that the RBI must maintain a contingency risk buffer between 5.5% and 6.5% of its balance sheet to safeguard against unforeseen financial shocks. As of March 31, 2024, the CRB stands at the upper end of this range-6.5%.
Impact on Surplus Transfers: Any adjustment to the CRB could directly influence the quantum of surplus (dividend) the RBI transfers to the government. A higher buffer would mean more reserves are retained, reducing the payout, while a lower buffer could free up additional funds for government use.
Record Surplus Transfer: For FY24, the RBI approved a record surplus transfer of ₹2.11 lakh crore to the central government, significantly boosting fiscal resources for policy initiatives and development projects.
No Immediate Changes: RBI Governor Sanjay Malhotra emphasized that the review is a routine, policy-driven exercise and not a reaction to current global uncertainties. Any decision on changing the CRB will be based on economic fundamentals and risk assessments, not short-term market factors.
Internal Assessment Underway: An internal committee is currently evaluating whether the framework remains effective or needs modification, with findings to be discussed with the board and government before any changes are implemented.

The outcome of this review will be closely watched by policymakers and markets alike, as it could shape the RBI’s future risk posture and the government’s fiscal space.

Source: CNBC TV18, Indian Express, Business Standard

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