Context:
RBI Board Approves Transfer of Rs 2.69 Lakh Crore Surplus to Centre for 2024-25 on the basis of the revised Economic Capital Framework (ECF)
Economic Capital Framework (ECF):
- Introduced by the Reserve Bank of India (RBI) in 2019 based on recommendations from the Bimal Jalan Committee.
- Forms a key part of the Enterprise-wide Risk Management (ERM) framework (2012).
- Designed to regulate risk provisioning and surplus transfer under Section 47 of the RBI Act, 1934.
- Purpose –
- Establishes a structured method for managing risk provisions and profit allocation.
- Ensures adequate financial reserves to absorb risks emerging from unforeseen economic disruptions.
- Aims to maintain financial stability while allowing for fiscal transfers.
- Tenure & Review Mechanism – The framework is to be reviewed every five years to adapt to evolving economic conditions.
- Adjustments can be made if significant economic risks emerge before the scheduled review.
- Major Revisions in ECF (2024-25) – CRB range expanded from 4.5% to 7.5% of RBI’s balance sheet.
- Increase in CRB to 7.5% reduced the surplus dividend transferred to the government.
- CRB serves as a national financial safeguard—a reserve for economic crises, aligning with RBI’s role as the Lender of Last Resort (LoLR).
- Market Risk Enhancements – Expanded to cover both on- and off-balance sheet exposures.
- Minor currency assets are now included under risk assessment.
Components of Economic Capital:
- Realized Equity – Includes RBI’s Capital, Reserve Fund, Contingency Fund (CF), and Asset Development Fund (ADF).
- Acts as financial security to tackle economic crises.
- Contingent Risk Buffer (CRB) – A portion of realized equity set aside to cover risks related to:
- Monetary & financial stability
- Credit risks
- Operational risks
- Revaluation Balances – Unrealized gains/losses arising from:
- Exchange rate fluctuations
- Gold price variations
- Interest rate movements
Source: IE
Previous Year Question
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
[UPSC Civil Service Exam – 2020 Prelims]
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b)