RBI's Internal Review On Economic Capital Framework Divided On Future

An internal review of the economic capital framework at the Reserve Bank of India is currently divided on future direction. According to people in the know, the internal committee are currently of two views when it comes to the framework which determines the quantum of RBI's surplus transfer to the government.

While one view in the internal committee is that the Bimal Jalan-recommended framework has stood the test of time and must continue as is, another view is the exact opposite. This part of the committee believes that global disruptions such as geopolitical tensions and trade issues have posed unexpected risks to the domestic economy. This may require the economic capital framework to raise the contingency risk buffer, leading to an impact on the surplus transfer.

To arrive at a final decision, the internal committee is waiting on specific directions from the central government.

The audit committee of the RBI's central board is set to meet on Thursday, ahead of the board meeting on Friday. The audit committee will review any directions from the government before recommending the final path on the framework review.

According to the existing framework, the contingency risk buffer is set between 5.5% and 6.5%, where the RBI's board decides the quantum of the provision. Depending on this, the surplus to be transferred may change.

In the financial year ending March 2024, the board had agreed to set the contingency risk buffer at 6.5% of the RBI's balance sheet. Still, the central bank was able to transfer an all-time high surplus transfer of Rs 2.11 lakh crore.

Economists expect the FY25 surplus to be between Rs 2.5 and 3.5 lakh crore. If the board decides to go with a 5.5% contingency risk buffer, these numbers could further be boosted.

According to news reports, the government is undertaking its own review of the economic capital framework, parallel with the RBI. Since the new economic capital framework was implemented in 2019, the regulator has transferred an all-time high surplus to the government twice.

RBI did not immediately respond to by NDTV Profit's request for comment.