The Reserve Bank of India (RBI) has recently announced a significant financial infusion to the central government. This move comes as part of the central government’s efforts to alleviate the economic downturn currently faced by the nation. The RBI is set to transfer a whopping Rs 1.76 lakh crore to the government, which includes two prominent components. Firstly, the surplus from the central bank’s 2018-19 fiscal year, which amounts to Rs 1.23 lakh crore. Secondly, an additional sum of Rs 52,637 crore, identified as surplus from excess provisions, as outlined in the updated Economic Capital Framework.
Revised Fiscal Deficit and Economic Stimulus Measures
The Indian government had previously adjusted the fiscal deficit target downwards from 3.3% to 3.4%. To boost economic activity and growth, the government implemented a series of strategies that have collectively been referred to as a ‘mini-budget.’
The Inception and Role of the Economic Capital Framework
The Economic Capital Framework was instigated by the RBI, with a committee led by Bimal Jalan, its former governor. The committee was given the task of reviewing the framework and suggesting the surplus amount for the transfer to the government.
Under this setup, the economic capital of the RBI has been divided into two main components: Realized Equity and Revaluation Balances. Revaluation balances consist of unrealized or notional gains/losses from the periodic market-value adjustments of foreign currencies, gold, securities, and a contingency fund.
On the other hand, realized equity represents a type of contingency fund, primarily built from retained earnings, meant to cover all potential risks and losses. It is also commonly referred to as the Contingent Risk Buffer (CBR).
The Recommendations of the Bimal Jalan Committee and their Implementation
In terms of surplus distribution policy, the RBI followed the guidelines recommended by the Bimal Jalan committee. The committee suggested a Contingent Risk Buffer range of 5.5-6.5% of the RBI’s balance sheet.
| Recommended CBR | Decided CBR | Excess Reserves Transferred |
|---|---|---|
| 5.5-6.5% | 5.5% | ₹52,637 crore |
Following these recommendations, the RBI decided to set the CBR level at 5.5% of the balance sheet. Consequently, the remaining excess reserves, totaling Rs 52,637 crore, will be transferred to the government.
Potential Implications of the Reduced CBR
The decision to maintain the CBR at the lower end of the recommended range has certain implications. If the CBR falls below this lower limit, the RBI will need to make risk provisions as required, transferring only the remaining net income, if any, to the government. However, holding the CBR at a lower range of 5.5% might limit the RBI’s flexibility to adjust monetary policy effectively. Source: TH
