Bimal Jalan Committee on Economic Capital Framework.
In 2018, the Reserve Bank of India (RBI), in collaboration with the Government of India (GOI), established a committee chaired by former RBI Governor Bimal Jalan. The primary objective of this committee was to review the economic capital framework of the RBI that was in place at that time. The Jalan Committee submitted its report to the RBI Governor in 2019.
The Committee's recommendations were based on several criteria, including:
- Consideration of the role of central banks in maintaining financial resilience.
- Analysis of cross-country practices.
- Evaluation of statutory provisions.
- Assessment of the impact of the RBI's public policy mandate and operating environment on its balance sheet.
- Examination of the risks involved.
The committee recognized the RBI's pivotal role in ensuring monetary, financial, and external stability in the country. It emphasized that the RBI's provisioning for various risks represents the nation's savings for potential crises and emergencies.
Economic Capital Definition: Economic capital comprises both realized and unrealized reserves. Realized equity is the surplus already earned and available for distribution, while unrealized reserves, or revaluation balances, represent notional gains or losses.
Key Recommendations:
- Financial Year Alignment: Align the financial year of the RBI with the fiscal year of the government for greater cohesiveness in various projections and publications.
- Periodic Review: Conduct a periodic review of the Economic Capital framework every five years.
- Interim Dividend: Allow the RBI to pay interim dividends to the government only under exceptional circumstances. This practice began in the fiscal year 2016-17.
- Contingency Fund Range: Maintain the Contingency Fund (CF) within the range of 6.5% to 5.5% of the economic capital.
Acceptance of Recommendations: The RBI Central Board accepted the recommendations of the Jalan Committee, particularly endorsing the adequacy of a 5.5% Contingency Fund. This decision reflects the importance of maintaining a balance between realized equity, revaluation reserves, and risk provisioning to ensure the RBI's resilience in the face of potential economic challenges.
