In a significant move to enhance financial resilience and transparency, the Reserve Bank of India (RBI) has revised its Economic Capital Framework (ECF) following an internal review. This update, approved during the Central Board’s meeting on May 15, 2025, marks the first major revision since the original framework’s adoption in 2019, based on recommendations by the Dr. Bimal Jalan-led Expert Committee. The revised framework will be effective from FY 2024-25.
Why Was the ECF Revised?
The initial ECF aimed to ensure that the RBI maintains a robust balance sheet while enabling sustainable surplus transfers to the Government. The framework was to be reviewed every five years to account for changing economic conditions and internal operational experiences. With growing complexity in financial markets and the evolving nature of risks, this review became essential to align the RBI’s risk provisioning strategy with emerging macroeconomic challenges.
Key Enhancements in the Revised Framework
While the foundational principles of the original ECF remain intact, several refinements have been introduced for greater flexibility, risk sensitivity, and prudence:
- Market Risk Provisions Enhanced The market risk buffer will now account for both on-balance sheet and off-balance sheet portfolios, providing a more comprehensive view of potential exposures. Investments in foreign currency assets, particularly those in minor currencies, are now included in the computation of the market risk buffer. The Central Board gains flexibility in maintaining market risk buffers within a range defined by Expected Shortfall (ES) at 99.5% to 97.5% confidence levels.
- Credit and Operational Risks No changes were made to credit and operational risk provisioning, indicating that the existing buffers in these areas are considered adequate for now.
- Monetary and Financial Stability Buffer The buffer range has been widened to 5.0% ± 1.5% of the balance sheet size. This allows the Central Board to adjust provisions between 3.5% to 6.5%, depending on current economic conditions.
- Contingent Risk Buffer Adjustments The revised Contingent Risk Buffer (CRB), encompassing all major risk categories, will now range between 4.5% and 7.5% of the balance sheet (down from a static 6.5% previously), reflecting a more dynamic risk appetite.
- Surplus Distribution Policy A significant shift is the conditional approach to surplus transfer to the Government. If available equity falls below the required minimum (after accounting for market risk shortfalls), no surplus will be distributed. Conversely, if equity exceeds 7.5% of the balance sheet size, the excess can be transferred from the Contingency Fund to income, potentially boosting surplus distribution.
Final Thoughts
The RBI’s revised Economic Capital Framework underscores a careful balancing act between financial stability and fiscal support. It integrates flexibility with fiscal responsibility, allowing the Central Board to adjust provisions as per macroeconomic realities while ensuring that the RBI remains well-capitalized to absorb potential shocks.
