RBI had constituted a panel on economic capital framework to address the issue of RBI reserves.The panel was headed by Bimal Jalan.
Economic capital framework refers to the risk capital required by the central bank as a counter against unforeseen risks or events or losses in the future.
The committee has recommended a review of the Economic Capital Framework every five years.However,in case of a significant change in the RBI’s risks and operating environment,an intermediate review may be considered.
The committee has also suggested that an interim dividend to the government must only be made in exceptional circumstances.
The Committee has recommended the alignment of the financial year of RBI with the fiscal year of the government for greater cohesiveness in various projections and publications brought out by RBI.
The panel has also suggested a clearer distinction between the two components of economic capital namely (a)realised equity and (b)revaluation balances.
Revaluation reserves comprise of periodic marked-to-market notional gains or losses in values of foreign currencies and gold, foreign securities and rupee securities and a contingency fund.
Realized equity is a form of a contingency fund for meeting all risks or losses primarily built up from retained earnings.It is also called the Contingent Risk Buffer(CBR).
The panel has given a range of 5.5-6.5% of RBI’s balance sheet for Contingent Risk Buffer(CBR).Hence,the RBI has decided to set the CBR level at 5.5% of the balance sheet.