The Reserve Bank of India (RBI) August 27 released the report compiled by an expert committee headed by Bimal Jalan, formed to review the Economic Capital Framework of the Central Bank.
“The Committee noted that while there may occasionally arise a difference of views in the conduct of the central bank’s operations, there always needs to be harmony in the objectives of the Government and the RBI,” the panel noted in the report.
Some of the recommendations of the committee included maintaining the RBI’s Contingency Risk Buffer (CRB), which is the country’s fund to handle a financial stability, to be maintained at a range of 5.5 percent to 6.5 percent of the RBI’s balance sheet, which is above the available level of 2.4 percent of balance sheet as on June 30, 2018.
“Application of these recommendations to RBI’s 2017-18 balance sheet is seen to result in RBI’s risk equity levels in a range of 25.4 per cent to 20.8 per cent of the balance sheet which will enable the RBI to retain one of the highest levels of financial resilience among central banks globally,” according to the report.
The report recommended a review of the Economic Capital Framework every five years. However, in case of a significant change in the RBI’s risks and operating environment, an intermediate review may be considered. It suggested that an interim dividend to the government must only be made in exceptional circumstances.
The committee recommended a more transparent presentation of the RBI’s annual accounts with regard to the components of economic capital, on the lines as mentioned in the table:
The Committee recommended the alignment of the financial year of RBI with the fiscal year of the government for greater cohesiveness in various projections and publications brought out by RBI.
It also recommended a surplus distribution policy which targets not only the total economic capital but also the realized equity level of the RBI’s capital. The report noted this will help bring about greater stability of surplus transfer to the government, with the quantum of the latter depending on balance sheet dynamics as well as the risk equity positioning by the Central Board.
The report noted that there will be no transfer of unrealized valuation buffers and these will be used as risk buffers against market risks.Subscribe to Moneycontrol Pro and gain access to curated market data, trading recommendations, stock analysis, investment ideas and insights from market gurus. Now, get Moneycontrol PRO for 1 year at Rs 289. Use code FREEDOM.
RBI releases report on Bimal Jalan panel review of Economic Capital Framework – Moneycontrol