RBI Notifications

Economic Capital Framework (ECF) of the RBI

Prelims Only | Economics | Mains Paper 3: Indian Economy
Note4Students

From UPSC perspective, the following things are important :

Prelims level: Economic Capital Framework (ECF) of the RBI

Why in the News?

The Reserve Bank of India (RBI) has initiated an internal review of its Economic Capital Framework (ECF) to assess the contingency risk buffer (CRB) and overall capital reserves.

What is Economic Capital Framework (ECF)?

  • The ECF is the risk management policy used by the RBI to determine:
  1. How much capital and reserves the central bank should maintain for financial stability.
  2. How much surplus the RBI can transfer to the government under Section 47 of the RBI Act, 1934.
  • Key Components
  1. Contingency Risk Buffer (CRB): A financial safeguard for monetary, fiscal, credit, and operational risks.
  2. Total Economic Capital: Includes capital, reserves, risk provisions, and revaluation balances.
  • Surplus Transfers:
    • FY24: ₹2.11 lakh crore (highest-ever surplus).
    • FY23: ₹87,416 crore | FY22: ₹30,307 crore | FY21: ₹99,122 crore.

Review of ECF and Its Significance

  • The Bimal Jalan Committee’s recommendations (valid till June 2024) required a periodic reassessment.
  • As of March 31, 2024, the CRB stands at 6.5%, and the RBI is evaluating whether changes are needed.
  • Potential Impact
    • Higher CRB → More financial stability, but lower surplus transfers to the government.
    • Lower CRB → More funds available for government spending, but with potential financial risks.
  • Impact on Budget: RBI’s surplus plays a major role in fiscal planning for infrastructure & welfare programs.
  • The RBI must ensure financial resilience while also supporting economic development.

About Bimal Jalan Committee (2018)

  • Objective: To review RBI’s reserve management and surplus transfer policy.
  • Key Recommendations:
    • CRB should be between 5.5% – 6.5% of the balance sheet.
    • Periodic ECF review every 5 years.
    • Only realized surplus (net income) should be transferred to the government.
    • Revaluation reserves should not be used for operational losses.
  • Impact:
    • Led to higher surplus transfers and a structured capital policy.
    • Strengthened transparency & financial governance in RBI’s operations.

 

PYQ:

[2017] Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)?

  1. It decides the RBI’s benchmark interest rates.
  2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
  3. It functions under the chairmanship of the Union Finance Minister.

Select the correct answer using the code given below:

(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only

 

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