Syllabus: GS3/Economy
Context
- The Board of Directors of Reserve Bank of India (RBI) has approved a record transfer of over 2.68 lakh crore rupees as surplus to the Central government for the financial year 2024-25.
About
- The surplus was calculated under the revised Economic Capital Framework, which now mandates maintaining the Contingent Risk Buffer (CRB) between 5.50 per cent and 7.50 per cent of the central bank’s balance sheet.
- For 2024-25, the CRB has been increased to 7.50 per cent.
- A higher risk buffer would mean a lower amount of transferable surplus and vice versa.
- This marks the highest-ever dividend transfer by the RBI, aimed at bolstering government finances amid ongoing economic challenges.
Economic Capital Framework
- The Economic Capital Framework (ECF) guides how the RBI manages its capital reserves and determines the surplus it can transfer to the Government of India.
- It was originally formulated based on recommendations from the Bimal Jalan Committee (2019) and adopted in RBI’s 578th meeting in 2019.
- The Bimal Jalan Committee had recommended a 5-year periodic review of the ECF.
- The 2025 review is the first such exercise since the framework’s adoption.
Key Features of the Revised ECF
- Continuity in Core Principles: The broad principles and risk assessment methodologies of the existing ECF were retained.
- The ECF continues to balance financial resilience with optimal surplus transfer to the government.
- Flexibility in Risk Buffer Maintenance: The revised framework allows the RBI Central Board greater flexibility to adjust risk buffers year-on-year.
- This allows adaptation to prevailing macroeconomic risks, such as inflation, global instability, or exchange rate volatility.
- Inter-Temporal Smoothening of Surplus Transfer: The framework enables smoother and more predictable surplus transfers to the Government over time.
- This avoids abrupt increases or cuts in transfer, aiding better fiscal planning for the government.
Why ECF Matters?
- Ensures the RBI retains adequate capital to maintain its monetary and financial stability mandate.
- Supports fiscal planning by providing the Government with a predictable flow of surplus.
- Protects the RBI from potential external shocks or changes in asset risks, while contributing to public finance health.
| How RBI Earns Profit and Decides Dividend? – Though RBI’s primary role is not to earn profit, but to maintain economic stability. – Its main functions include: Ensuring price stability (controlling inflation), Managing currency issuance, Handling foreign exchange reserves, Regulating the banking system & managing government debt. – Despite these roles, profit can emerge as a byproduct of RBI’s operations. – RBI earns through: 1. Interest on government bonds it holds. 2. Lending to banks (like repo operations). 3. Foreign exchange operations (buying/selling dollars). 4. Seigniorage – Profit from printing currency (since printing cost < face value). 5. Market operations – It buys/sells assets to control liquidity and earns interest or capital gains. |
Source: AIR
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