Economic Capital Framework Committee of RBI

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Economic Capital of RBI

Mains level: Debate regarding the independence of RBI and Fiscal Strain on Govt.


News

A new Committee to decide on EC

  1. The Central Board of RBI in consultation with the Govt. of India has constituted an Expert Committee to review the extant Economic Capital Framework of the RBI.
  2. The RBI has named former RBI governor, Bimal Jalan to head the Framework committee.
  3. Expert committee on economic capital framework will have to give its report within 90 days from its first meeting.

Mandate of the Committee

  1. Review status, need and justification of various provisions, reserves and buffers presently provided for by the RBI.
  2. Review global best practices followed by the central banks in making assessment and provisions for risks which central bank balance sheets are subject to.
  3. To suggest an adequate level of risk provisioning that the RBI needs to maintain.
  4. To determine whether the RBI is holding provisions, reserves and buffers in surplus / deficit of the required level of such provisions, reserves and buffers.
  5. To propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding less provisions than required.
  6. Any other related matter including treatment of surplus reserves, created out of realised gains, if determined to be held.

Past Committees Recommendations

  1. In the past, the issue of the ideal size of RBI’s reserves was examined by three committees — V Subrahmanyam (1997), Usha Thorat (2004) and Y H Malegam (2013).
  2. While the Subrahmanyam committee recommended that contingency reserve should be built up to 12 per cent, the Thorat committee had said the reserve adequacy should be maintained at 18 per cent of the total assets.
  3. The RBI board did not accept the recommendation of the Thorat committee and decided to continue with the recommendation of the Subrahmanyam panel.
  4. The Malegam committee recommended that adequate amount of profits should continue to be transferred each year to contingency reserves.
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