RBI's wider risk buffer range aimed at flexibility in times of uncertainty

RBI revises CRB range to 4.5-7.5% under updated ECF, giving it flexibility to manage surplus transfers and avoid large fiscal shocks in volatile conditions

The central bank’s revised economic capital framework (ECF) is intended to give the regulator greater flexibility to smooth surplus transfers to the government in a way that does not impact its (the government’s) fiscal maths in a given year, according to experts.

 

The framework expanded the range of the contingency risk buffer (CRB) to 4.5-7.5 per cent.

 

The Reserve Bank of India’s (RBI’s) central board last week approved a record ₹2.69 trillion surplus transfer to the government for 2024-25 even after maintaining the CRB at 7.5 per cent — the upper end of the revised range it approved following a review of the ECF. This was supported by the RBI’s earnings on foreign-exchange transactions.

 

The RBI’s gross dollar sales surged to $399 billion in FY25 from $153 billion in FY24. There was increased interest income from government securities and lower provisioning for revaluation losses on assets, amid possible mark-to-market gains on both foreign and domestic asset holdings.

 

Earlier, the CRB range was 5.5-6.5 per cent. From FY19 to FY22, the RBI maintained the CRB at 5.50 per cent of its balance sheet. 

 

However, in FY23, it increased the CRB to 6 per cent, and in FY24 it further increased it to 6.5 per cent.

 

“In an exceptional year like FY25, the RBI may opt to raise the CRB to 7.5 per cent, thereby transferring a lower surplus to the government. Conversely, during a challenging year for the RBI, it could reduce it to 4.5 per cent to maintain a reasonably stable surplus transfer. This approach is a prudent move, particularly in the current volatile global environment, as a large portion of its foreign currency assets is invested in overseas securities, primarily US Treasuries,” said Gaura Sen Gupta, chief economist, IDFC First Bank. 

 

The central board adopted the ECF based on based on the recommendations of the expert committee, chaired by former RBI governor Bimal Jalan. The expert committee had recommended that the framework be periodically reviewed every five years.

 

Following the review, the central board noted that the ECF had met its objective of ensuring a resilient balance sheet while maintaining a healthy transfer of surplus to the government.

 

However, the board made certain changes, with the objective of further strengthening the framework to align better with any emerging risks to the balance sheet of the RBI.

 

“The revised ECF provides requisite flexibility year-on-year to the central board in the maintenance of risk buffers, considering the prevailing macroeconomic and other factors, while also ensuring needed intertemporal smoothing of the surplus transfer to the Government,” the RBI said.

 

According to a Barclays report, the issues likely arose from the uneven nature of transfers: The transfer of ₹2.1 trillion in FY24 was the highest ever then, more than double the ₹90,000 crore transferred in FY23.

 

The FY22 transfer, of ₹30,000 crore, was the lowest in more than a decade.

 

“The reason it has been widened is to provide flexibility in uncertain environments,” said Indranil Pan, chief economist, Yes Bank, adding that the range was quite broad.

 

“If in future the board thinks the risk buffer is no longer needed to the same extent as today, it can reduce it.”