Economic Capital Framework (ECF)

Context:

The Reserve Bank of India (RBI) Central Board convened on May 15, 2025 to review the Economic Capital Framework (ECF).

Definition of Economic Capital Framework (ECF)

The Economic Capital Framework (ECF) is the risk management policy of the Reserve Bank of India (RBI) that determines:

• How much capital and reserves the RBI must maintain to safeguard financial stability.
• How much surplus the RBI can legally transfer to the Government of India under Section 47 of the RBI Act, 1934.

Key Components of the ECF

• Contingency Risk Buffer (CRB):
  • A financial cushion for unforeseen monetary, credit, fiscal, and operational risks.
  • Recommended target: 5.5% to 6.5% of the RBI’s balance sheet.
  • As of March 31, 2024: CRB = 6.5%.
• Total Economic Capital:
  • Includes:
    • Paid-up capital
    • Reserves
    • Risk provisions (CRB + Asset Development Fund)
    • Revaluation balances (unrealized gains/losses from gold, forex, interest rate changes)

RBI Surplus Transfers to the Government (Under ECF)

• These transfers are made after provisioning for risks under ECF.

Significance of ECF

• Bimal Jalan Committee (2018) reviewed the framework and set the current guidelines, valid till June 2024.
• The RBI board is now reassessing the framework to determine whether changes are needed, especially in light of fiscal demands and financial risks.

Potential Impacts of ECF on Fiscal Management

Balancing Act

• The RBI must maintain a delicate balance:
  • Ensure financial resilience and credibility as a central bank.
  • Support economic development through prudent surplus distribution.