Economic Capital Framework by Reserve Bank of India (RBI)

RBI approved the transfer of a record ₹2,10,874 crore as surplus to the Union government for the accounting year 2023-24. Know all about Economic Capital Framework of RBI.

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Context

The Reserve Bank of India (RBI) approved the transfer of a record ₹2,10,874 crore as surplus to the Union government for the accounting year 2023-24.
This transfer is more than double the ₹87,416 crore transferred in FY23.

Economic Capital Framework

Adopted: On August 26, 2019.
Recommended By: The Expert Committee (Chair. former governor Bimal Jalan) to Review the extant Economic Capital Framework of the Reserve Bank of India.
Objective: To build harmony between the central bank’s need for autonomy and the Government’s objectives of development.

Recommendations of the Bimal Jalan Committee

Distinction in Economic Capital Components:
- Realised Equity: This should be used for meeting all risks and losses as it is built primarily from retained earnings.
- Revaluation Balances: Should be considered only as risk buffers against market risks since they represent unrealized valuation gains and are not distributable.
Risk Provisioning for Market Risk: Recommended adopting the Expected Shortfall (ES) methodology under stressed conditions instead of the existing stressed value at Risk.
- Target an ES with a 99.5% confidence level for measuring the RBI’s market risk.
Size of Realised Equity: Maintain the Contingent Risk Buffer (CRB), primarily from retained earnings, within a range of 5% to 5.5% of the RBI’s balance sheet.
- This includes 5.5% to 4.5% for monetary and financial stability risks.
- 0% for credit and operational risks.
Surplus Distribution Policy: Recommended a policy targeting the level of realised equity to be maintained by the RBI.
- Only if realised equity is above its requirement, will the entire net income be transferable to the government.
Periodic Review: Suggested the RBI’s economic capital framework be periodically reviewed every five years.