RBI board reviews economic capital framework ahead of surplus transfer

RBI board reviews Economic Capital Framework as part of five-year cycle, with FY25 surplus transfer expected to set a new record amid strong balance sheet gains

The central board of the Reserve Bank of India (RBI) on Thursday met and reviewed the economic capital framework (ECF), ahead of the next board meeting later this month to finalise how much surplus it would transfer to the central government.

 

The board is scheduled to meet on May 23 to discuss the working of the RBI during April-March 2024-25 and approve the annual report and accounts for the accounting year 2024-25, and decide on the transferable surplus.

 

The transferable surplus for a year is arrived at on the basis of the ECF adopted by the central bank in 2019 in accordance with the recommendations of an expert committee. That was for finalising the accounts of 2018-19.

 

Former RBI governor Bimal Jalan had chaired the committee.

 

“As part of the agenda, inter alia, the Board reviewed the Economic Capital Framework (ECF) of the Reserve Bank of India,” the central bank said in a statement.

 

It was recommended by the Jalan committee that the framework had to be reviewed every five years. The panel recommended if there was a significant change in the RBI’s risks and operating environment, an intermediate review might be considered.

 

The committee had recommended that risk provisioning under the “contingent risk buffer” (CRB) be maintained within 6.5-5.5 per cent of the RBI’s balance sheet.

 

During accounting years 2018-19 to 2021-22, owing to the prevailing macroeconomic conditions and the pandemic, the board had decided to maintain the CRB at 5.50 per cent of the balance sheet to support growth, the central bank had said last year after the board meeting to decide the surplus to be transferred to the government. 

 

With revival in economic growth in 2022-23, the CRB was increased to 6.00 per cent. As the economy remains robust and resilient, the board has decided to increase the CRB to 6.50 per cent for 2023-24, it further said.

 

“The ECF is scheduled for review every five years, and the current review is part of that cycle,” said Gaura Sen Gupta, chief economist, IDFC First Bank.

 

“At present, the RBI’s capital adequacy ratio is higher than that of most major central banks. Therefore, there appears to be no pressing need to alter the ECF. The recommended overall risk buffer ranges from 20.8 per cent to 25.4 per cent, and the RBI’s current buffer stands at 24.6 per cent. Additionally, the CRB has been maintained at 6.5 per cent, which is already at the upper end of the range recommended by the Jalan committee,” said Sen Gupta.

 

For 2023-24, the board approved the highest ever surplus transfer of ₹2.11 trillion.

 

The size of the balance sheet increased by ₹7.02 trillion, or 11.08 per cent, to ₹70.48 trillion as on March 31, 2024.

 

Economists said FY25 might see a record as a Business Standard poll showed a surplus transfer ranging from ₹2.2 trillion to ₹3.1 trillion.

 

“Given the current circumstances, it appears there is no need to alter the CRB. This year, the RBI’s dividend is expected to be higher, driven by net dollar sales and earnings from the sale of securities,” said Madan Sabnavis, chief economist, Bank of Baroda.

 

Chaired by RBI Governor Sanjay Malhotra, all the four deputy governors, secretaries to the departments of economic affairs and financial services, and other board members attended the meeting.