RBI to transfer Rs. 1.76 trillion to the Government of India to meet fiscal deficit target

The Reserve Bank of India (RBI) has decided to transfer Rs. 1.76 trillion to the Government of India. As per the revised Economic Capital Framework (ECF), the transfer is set to include Rs. 1.23 trillion of surplus for 2018-19 and Rs. 52,637 crore of excess provisions adopted at the meeting of the Central Board (Board). The surplus transfer was finalized in line with the recommendations of the Expert Committee to Review the Extant Economic Capital Framework (Committee) under former Central Bank Governor Bimal Jalan. The six-member panel headed by Jalan was appointed in December to review the ECF for RBI.

The Committee’s recommendations were guided by the fact that the RBI forms the primary bulwark for monetary, financial and external stability. The Board also reviewed the current economic situation, global and domestic challenges and various areas of operations of the Reserve Bank.

The transfers from RBI could be either used to provide fiscal stimulus to the economy, reduce off-balance sheet borrowings or meet the expected shortfall in revenue collections.

According to a statement issued, the RBI committee recommended a surplus distribution policy, to target the level of realized equity to be maintained by RBI within the overall level of its economic capital.

The Committee reviewed the status, need and justification of the various reserves, risk provisions and risk buffers maintained by the RBI and recommended their continuance. A clearer distinction between the two components of economic capital (realized equity and revaluation balances) was also recommended by the Committee as realized equity could be used for meeting all risks/ losses as they were primarily built up from retained earnings, while revaluation balances could be reckoned only as risk buffers against market risks as they represented unrealized valuation gains and hence were not distributable.

However, the board has not dealt with the revaluation reserves comprising of the periodic marked-to-market unrealized/notional gains/losses in values of foreign currencies and gold, foreign securities and rupee securities, and a contingency fund.

The Committee reviewed the status, need and justification of the various reserves, risk provisions and risk buffers maintained by the RBI and recommended their continuance. The Committee also recommended the development of methodologies for assessing the concentration risk of the forex portfolio as well as jointly assessing the RBI’s market-credit risk.

The Committee has recommended the adoption of Expected Shortfall (ES) methodology under stressed conditions (in place of the extant Stressed-Value at Risk) for measuring the RBI’s market risk on which there was growing consensus among central banks as well as commercial banks over the recent years

As on June 30, 2019, the RBI stands as a Central Bank with one of the highest levels of financial resilience globally. The Board also reviewed the current economic situation, global and domestic challenges and various areas of operations of the Reserve Bank. Shri Shaktikanta Das, Governor of the RBI chaired the 578th meeting of the Central Board.