Core Issue
- The Finance Ministry is conducting a parallel review of the RBI’s Economic Capital Framework (ECF).
- Focus: Assess whether the Contingency Risk Buffer (CRB) maintained by RBI can be reduced to enable higher dividend transfers to the government.
Relevance : GS 3(Economy ,Banking)
Background
- Economic Capital Framework (ECF):
- Determines how much capital the RBI must retain for financial stability.
- Reviewed in 2018 by the Bimal Jalan Committee.
- Recommended a CRB of 5.5–6.5% of RBI’s balance sheet.
- Dividend transfer: Amount over and above the CRB is transferred as surplus (dividend) to the government.
Government’s Motivation
- Higher transfers = More fiscal space for the Centre.
- Government reportedly aiming to increase defence expenditure amid rising security concerns (e.g., with Pakistan).
- Greater surplus would aid in meeting fiscal deficit targets or enhancing capital spending.
Current Developments
- Since January 2025, the RBI has been internally reviewing the ECF.
- Government is conducting a parallel, independent review of buffer norms.
- Official: Some believe the Jalan recommendations were too conservative, and there’s room to lower the buffer.
RBI’s Position
- RBI held its 615th central board meeting and reviewed the ECF.
- No formal decision announced yet, but outcome will influence surplus transfer.
Strategic Implications
- Lowering CRB:
- Frees up more funds for government use, boosting fiscal flexibility.
- But reduces the RBI’s cushion against economic/financial crises.
- Raises concerns about central bank autonomy vs. government fiscal needs.
Broader Context
- Similar tensions were seen in 2018–19 leading to friction between the RBI and Finance Ministry.
- ECF review is critical for:
- Monetary policy independence
- Crisis preparedness
- Centre’s fiscal planning
