RBI's Record Surplus Transfer and Economic Capital Framework Adjustment
The Reserve Bank of India's (RBI) central board approved a record surplus transfer of ₹2.69 trillion to the government for the fiscal year 2024-25. This decision came even after increasing the Contingent Risk Buffer (CRB) to the upper range of 7.5%, following a review of the Economic Capital Framework (ECF).
Contingent Risk Buffer (CRB)
- The CRB range was expanded from 5.5-6.5% to 4.5-7.5% of the RBI's balance sheet, allowing more flexibility.
- This is the second consecutive year that RBI has transferred a record surplus, with the previous year’s transfer being ₹2.11 trillion while maintaining a 6.5% buffer.
Economic Capital Framework (ECF)
- The surplus is determined based on the ECF, adopted in 2019 after the Bimal Jalan Committee's recommendations.
- RBI reviewed the framework after five years to ensure a resilient balance sheet and healthy surplus transfers.
Factors Contributing to Higher Surplus
- RBI booked profits from heavy dollar sales in the previous fiscal year, with gross sales reaching $399 billion.
- On a net basis, $34.5 billion was sold, the highest since the 2008-09 global financial crisis.
Impact on Government's Fiscal Deficit
- Soumya Kanti Ghosh of State Bank of India suggests this surplus could ease the fiscal deficit by 20 basis points from the projected 4.4% of GDP.
Market Expectations and Reactions
- The bond market expected a higher surplus of around ₹3 trillion without a broadened CRB range.
Internal Review and Adjustments
- RBI undertook an internal review of the ECF, considering external environment developments and asset profile changes.
- Minor changes were made to strengthen the framework against emerging risks.
Surplus Distribution Policy
- If Available Realised Equity (ARE) exceeds 7.5% of the balance sheet, it may be written back from the Contingency Fund to income.
- If ARE is below 4.5%, no surplus will be transferred to the government until the minimum required equity level is achieved.
Reasons for CRB Range Expansion
- The expansion aims to smoothen dividend payouts and guard against global volatility, providing flexibility in provisioning based on revenue.