RBI in 'formidable position' to fulfil public policy mandates: DG Murmu

RBI Deputy Governor Shirish Chandra Murmu says the central bank's economic capital, risk buffers and revaluation practices place it in a strong position to meet its policy mandates

The Reserve Bank of India (RBI) has an economic capital that’s 25 per cent of its balance sheet and puts it in a “formidable position” to fulfill its public policy mandates while ensuring monetary and financial stability, said Deputy Governor Shirish Chandra Murmu on Friday.

 

“The prudent accounting policies over the years have ensured that RBI has a strong and resilient balance sheet, with risk provisions in the form of realised equity and revaluation balances currently at 7.5 per cent and 17.4 per cent of the balance sheet, respectively,” Murmu said at the International Conference on Central Bank Accounting Practices in Mumbai.

 

 

The RBI has a transparent, publicly disclosed, and rule-based surplus distribution policy under the Economic Capital Framework (ECF). The framework recognises that realised equity should cover monetary and financial stability risks, credit risk, and operational risks, while the revaluation balances should cover market risk, he said.

 

“After making the required provisions, the remaining surplus is transferred to the government. Since the introduction of the ECF, RBI has consistently maintained its risk buffers at the prescribed levels, even in the face of unprecedented challenges such as the Covid-19 pandemic and the subsequent global monetary tightening,” he said, adding that the ECF was recently reviewed internally and risk assessment has been made more granular.

 

The RBI has over the years built provisions for the Contingency Fund and Asset Development Fund from realised profits. The revaluation accounts — Investment Revaluation Accounts and the Currency and Gold Revaluation Account (CGRA) — reflect the unrealised gains or losses arising from revaluation of investments and translation of foreign currency assets into Indian Rupees.

 

“RBI revalues the entire forex reserves portfolio on a daily basis and does not carve out any portion for amortised valuation. All foreign currency assets and gold are translated to Indian rupee daily at market exchange rates prevailing on the day, which gets reflected under the CGRA. Domestic securities are marked-to-market on a weekly basis and at the end of each month,” he said. As a prudent accounting practice, the RBI does not recognise unrealised revaluation and translation gains on securities and gold as income but reflects them as revaluation balances on its balance sheet.

 

On the other hand, any unrealised losses on revaluation of domestic or foreign securities are charged to the Contingency Fund at the end of the year when accounts are finalised. There is no “fungibility” between the various revaluation heads, implying that the RBI prudently provides for any revaluation loss on account of investments and does not offset it with a positive CGRA balance, and vice-versa, Murmu said.

 

Murmu said central banks must work closely to navigate emerging challenges such as the sharp rise in gold prices and the potential impact of Central Bank Digital Currency (CBDC) adoption on future balance sheets and financial stability.

 

“...the recent sharp rise in gold prices has garnered a lot of attention and discussion globally with respect to its impact on central bank balance sheets. RBI conservatively revalues its gold holdings at 90 percent of the London Bullion Market Association gold price. However, gold revaluation practices vary across countries, and the impact of high movements in gold prices on central bank balance sheets and income needs wider discussion,” Murmu said.

 

Murmu said some research papers have explored how the design choices of central banks may influence people’s behaviour with respect to CBDC adoption and the potential substitution of banknotes and/or bank deposits with CBDCs. It is also being discussed globally whether and how this may impact central bank balance sheet structures and the need for liquidity operations.

 

“These emerging aspects will require ongoing engagement and collaboration in the future as central banks learn from each other’s experiences. We should work closely in these areas and share our experiences and research, which will help all of us make better decisions,” he said.