RBI Releases Report On Review Of Economic Capital Framework

The Reserve Bank of India (RBI), published a report submitted by expert committee to review the economic capital framework (ECF) of the central bank on August 27, 2019. “The Committee also 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,” stated the report. There are various recommendations given by the Committee, one is to have a surplus distribution policy, which targets not only the total economic capital (as per the extant framework) but also the realised equity level of RBI’s capital. 

“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. There will be no transfer of unrealized valuation buffers and these will be used as risk buffers against market risks,” the report mentioned. That said, the Committee has also recommended that when it comes to financial year, RBI’s accounting year (July to June) may be brought in sync with the fiscal year (April to March) from the financial year 2020-21. 

The reason being as July-June year would have been linked to the agricultural seasons, which doesn’t align well in the current times of economy. “The Committee recommends 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. Further, in the following years, interim dividend to the Government may be paid only under exceptional circumstances,” highlighted the report. 

Further as per the Committee there is need that the framework should be reviewed every five years. Also, in case of significant change when it comes to RBI’s risks and operating environment, an intermediate review should be considered. The Committee also suggested the adoption of the basel III standardised approach for assessing credit risk of the forex portfolio as well as the new standardised approach for operational risk.