{"id":51719,"date":"2019-08-30T19:00:29","date_gmt":"2019-08-30T13:30:29","guid":{"rendered":"https:\/\/blogadmin.forumias.com\/?p=51719"},"modified":"2019-08-30T15:59:36","modified_gmt":"2019-08-30T10:29:36","slug":"7-pm-govt-needs-to-prudent-in-using-rbis-transfer-30th-august-2019","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/7-pm-govt-needs-to-prudent-in-using-rbis-transfer-30th-august-2019\/","title":{"rendered":"7 PM | Govt. Needs to prudent in using RBI\u2019s transfer | 30th August, 2019"},"content":{"rendered":"\n<p><strong>Context:<\/strong> RBI\u2019s\nEconomic Capital Framework (ECF) and its significance <\/p>\n\n\n\n<p><strong>More in news: <\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The Reserve Bank of\nIndia, in consultation with the Government of India, had constituted an expert\ncommittee, under chairmanship of Bimal Jalan, to review whether the central\nbank was holding on to too much of its reserves.<\/li><\/ul>\n\n\n\n<p><strong>What\nis economic capital framework?<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The Reserve Bank of India (RBI) has\ndeveloped an Economic Capital Framework (ECF) in 2014-15 to provide an\nobjective, rule-based, transparent methodology for determining the appropriate\nlevel of risk provisions to be made under Section 47 of the Reserve Bank of\nIndia Act, 1934.<\/li><li>Economic capital\nframework refers to the&nbsp;risk capital required by the central bank while\ntaking into account different risks. The economic capital framework reflects\nthe capital that an institution requires or needs to hold as a counter against\nunforeseen risks or events or losses in the future.<\/li><\/ul>\n\n\n\n<p><strong>What\nrisks faces by RBI?<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Market risk<\/strong>: which captures the risk arising out of changes in valuation of the assets of the RBI, including foreign reserves, gold and Government securities <\/li><li><strong>Credit risk:\u00a0 <\/strong>in the form of losses arising due to default by counterparties. <\/li><li><strong>Operational risk:<\/strong> \u00a0which arises from losses incurred from inadequate or failed internal processes, people and systems; or from external events (including legal risk)<\/li><li><strong>Contingent risk:<\/strong> which arises from<ul><li>The RBI\u2019s Emergency Liquidity Assistance (ELA) operations and their impact on the balance sheet size and structure (for example, losses on collateral obtained when injecting emergency liquidity into troubled banks); <\/li><li>Inflation management operations<\/li><li>Currency stabilization operations.<\/li><\/ul><\/li><\/ul>\n\n\n\n<p><strong>Components\nof ECF:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The Economic Capital\nFramework consists of two components of RBI\u2019s economic capital &#8211; realized\nequity and revaluation balances.<\/li><li>Realized equity: The component of RBI\u2019s\neconomic capital comprising its Capital, Reserve Fund and risk provisions (CF\nand ADF)<\/li><li>Revaluation balances\nare highly volatile, and whose levels move autonomously depending on RBI\u2019s\ndischarge of its public policy objectives of maintaining price, financial and\nexternal stability, coupled with international market developments reflected in\nmovements in the price of foreign assets, exchange rate, interest rate and gold\nprice. <\/li><\/ul>\n\n\n\n<p><strong>&nbsp;Recommendations of\nBimal Jalan Committee:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>RBI\u2019s\neconomic capital:<\/strong> The Committee reviewed the status, need\nand justification of the various reserves, risk provisions and risk buffers\nmaintained by the RBI and recommended their continuance. <\/li><li>A clearer distinction between the two\ncomponents of economic capital (realized equity and revaluation balances) was\nalso recommended by the Committee.<\/li><li>As realized equity could be used for\nmeeting all risks\/ losses as they were primarily built up from retained\nearnings, while revaluation balances could be reckoned only as risk buffers against\nmarket risks as they represented unrealized valuation gains and hence were not\ndistributable.<\/li><li><strong>Risk\nprovisioning for market risk:<\/strong> The Committee has recommended the\nadoption of Expected Shortfall (ES) methodology under stressed conditions (in\nplace of the extant Stressed-Value at Risk) for measuring the RBI\u2019s market risk\n<\/li><li>While central banks are seen to be adopting\nES at 99 per cent confidence level (CL), the Committee has recommended the\nadoption of a target of ES 99.5 per cent CL keeping in view the macroeconomic\nstability requirements.<\/li><li><strong>Size\nof Realized Equity:<\/strong> Realized equity is also required to\ncover credit risk and operational risk. This risk provisioning made primarily\nfrom retained earnings is cumulatively referred to as the Contingent Risk Buffer\n(CRB) and has been recommended to be maintained within a range of 6.5 per cent\nto 5.5 per cent of the RBI\u2019s balance sheet.<\/li><li><strong>Surplus\nDistribution Policy:<\/strong> The Committee\nhas recommended a surplus distribution policy which targets the level of\nrealized equity to be maintained by the RBI. Only if realized equity is above\nits requirement, will the entire net income be transferable to the Government.\nIf it is below the lower bound of requirement, risk provisioning will be made\nto the extent necessary and only the residual net income (if any) transferred\nto the Government.<strong> <\/strong><\/li><\/ul>\n\n\n\n<p><strong>Past\nRecommendations of Size of Reserves\/Buffer: <\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>I. Usha Thorat Committee:<ul><li>Assuming that total assets consist of Foreign Currency Assets (FCA) and gold, Committee (2004) the CGRA + CR (Contingency Reserve) can together be 12.26% of total assets<\/li><li>CR requirements for interest rate risk may be taken as 2% of total assets<\/li><li>Provision of 3.5% towards other risks such as monetary and exchange market operations, investments in subsidiaries and associates, operational risks, etc <\/li><\/ul><\/li><li>II. Subrahmanyam Committee (1997):\u00a0 <ul><li>Internal reserves for absorbing shocks in external assets should be at least 25% of FCA and gold <\/li><li>5% of total assets should be set aside towards losses which cannot be absorbed by current earnings <\/li><li>There should be a reserve of 2% of total assets towards systemic risks<\/li><\/ul><\/li><\/ul>\n\n\n\n<p><strong>What\nways this surplus transfers helps the Government:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Tax\nrevenue shortfall<\/strong>: With the economy slowing down and the\nGoods and Services Tax (GST) not kicking in the expected buoyancy, the\nshortfall may even be higher. The infusion of additional funds, thus, will help\nthe government to substantially overcome this shortfall<\/li><li><strong>Fiscal\ndeficit: <\/strong>governmenthas a control on its expenditure\nthrough Fiscal Deficit target. With transfer of surplus of RBIs reserves,\ntarget will be within range of government<\/li><li>If, on the other hand, the tax revenue\ngrowth picks up, then the government can use the additional money to clear the\ndues of the Food Corporation of India and fertilizer companies to minimize\nspillover of deficits to the next year<\/li><\/ul>\n\n\n\n<p><strong>Way\nforward:<\/strong>\nThe decision of the RBI Board must be welcomed as it has not come a day sooner\nand should help the government in combating the economic slowdown and to\nconform to the fiscal targets. It is hoped that the government will be prudent\nin using these funds.<\/p>\n\n\n\n<p>Source:\n<a href=\"https:\/\/www.thehindu.com\/opinion\/lead\/govt-needs-to-be-prudent-in-using-rbis-transfer\/article29291770.ece\">https:\/\/www.thehindu.com\/opinion\/lead\/govt-needs-to-be-prudent-in-using-rbis-transfer\/article29291770.ece<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Context: RBI\u2019s Economic Capital Framework (ECF) and its significance More in news: The Reserve Bank of India, in consultation with the Government of India, had constituted an expert committee, under chairmanship of Bimal Jalan, to review whether the central bank was holding on to too much of its reserves. What is economic capital framework? The&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/7-pm-govt-needs-to-prudent-in-using-rbis-transfer-30th-august-2019\/\">Continue reading <span class=\"screen-reader-text\">7 PM | Govt. Needs to prudent in using RBI\u2019s transfer | 30th August, 2019<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":49370,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,9],"tags":[],"class_list":["post-51719","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-7-pm","category-public","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2019\/07\/7-PM.png?fit=1000%2C500&ssl=1","views":{"total":0,"cached_at":"","cached_date":1704952929},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/51719","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=51719"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/51719\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/49370"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=51719"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=51719"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=51719"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}