RBI’s contingency fund

In News: THE SURPLUS available with the Reserve Bank of India for transfer or the RBI dividend to the Union government is likely to remain low in the current financial year ending March 2023 because of higher expenditure incurred by the central bank due to rising interest rates and higher costs in managing surplus liquidity in the system.

Contingency Fund

• This is a specific provision meant for meeting unexpected and unforeseen contingencies, including depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks and any risk arising on account of the special responsibilities enjoined upon the Reserve Bank.
• This amount is retained within the RBI.

Currency and Gold Revaluation Account (CGRA)

• It is maintained by the Reserve Bank to take care of currency risk, interest rate risk and movement in gold prices.
• Unrealised gains or losses on valuation of foreign currency assets (FCA) and gold are not taken to the income account but instead accounted for in the CGRA.
• Net balance in CGRA, therefore, varies with the size of the asset base, its valuation and movement in the exchange rate and price of gold.
• CGRA provides a buffer against exchange rate/ gold price fluctuations. It can come under pressure if there is an appreciation of the rupee vis-à-vis major currencies or a fall in the price of gold.
• When CGRA is not sufficient to fully meet exchange losses, it is replenished from the CF.

IRA-FS and IRA-RS accounts:

• The unrealised gains or losses on revaluation in foreign dated securities are recorded in the Investment Revaluation Account Foreign Securities (IRA-FS).
• Similarly, the unrealised gains or losses on revaluation is accounted for in Investment Revaluation Account-Rupee Securities (IRA-RS).
• In the Investment Revaluation Account-Foreign Securities (IRA-FS), the foreign dated securities are marked-to market on the last business day of each week ending Friday and the last business day of each month and the unrealised gains or losses are transferred to the IRAFS.

Economic capital framework

• Bimal Jalan-led panel was constituted to review the RBI’s Economic Capital Framework (ECF).
• The RBI transfers surplus to the government as per the economic capital framework (ECF) adopted by the RBI board
• The RBI normally pays the dividend from the surplus income it earns on investments and valuation changes on its dollar holdings and the fees it gets from printing currency, among others.
• The RBI should maintain a Contingent Risk Buffer, which mostly comes from the CF, of between 5.5-6.5% of the central bank’s balance sheet.
• RBI should put in place a framework for assessing the market risk of its off-balance sheet exposures in view of their increasing significance.
• The surplus distribution policy should move away from targeting total economic capital alone.
• A review of RBI’s economic capital framework should be conducted every five years.

Repo and Reverse repo:

• Repurchase Agreements (Repo) are conducted whenever the Central Bank is mopping up excess liquidity from the domestic market.
• A Repo is a collateralized loan involving a contractual arrangement between two parties, whereby one party sells a security at a specified price with a commitment to buy back the same at a later date.
• The repo rate is the interest paid by RBI to Commercial Banks for lending money in the repo market.
• Reverse Repos, on the other hand, are conducted whenever the Central Bank is injecting liquidity into the domestic market.
• Reverse Repo transactions therefore, involve purchase of Government securities by RBI from Commercial Banks.
• The reverse repo rate is the interest paid by commercial banks for borrowing money from the Central bank.
• Under reverse repo, the RBI borrows from banks, while under the repo window, RBI lends to banks.
• The reverse repo rate is 3.35 per cent and the repo rate is 6.25 per cent.

Sources: Indian express

Previous Year Question

Q.1) If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (2020)

1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

1. 1 and 2 only
2. 2 only
3. 1 and 3 only
4. 1, 2 and 3