In News:
- The Reserve Bank of India (RBI) has retained Rs 73,615 crore within the RBI by transferring it to the Contingency Fund (CF) of the central bank.
Key RBI’s reserves
Revaluation Accounts:
- The Currency & Gold Revaluation Account (CGRA):
- Unrealised gains/ losses on valuation of Foreign Currency Assets (FCA) and Gold are not taken to the Income Account but instead accounted for in the CGRA.
- Any gains (or even losses) in the value of RBI’s holdings of large amounts of gold are adjusted in this account. If gold prices shoot up, this account grows fast too.
- Exchange gains and losses arising from converted value of foreign currency assets and liabilities are also accounted in this account.
- The RBI notionally gains or loses on this count according to market movements.
- For example, during 2019-20, the balance in CGRA increased by Rs 3 lakh crore mainly due to depreciation of rupee (so foreign currency assets increased in value in rupee terms) and the rise in the international price of gold.
- Why this is needed:
- The major sources of market risk faced by the Reserve Bank are currency risk, interest rate risk and movement in gold prices.
- 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.
- Unrealised gains/ losses on valuation of Foreign Currency Assets (FCA) and Gold are not taken to the Income Account but instead accounted for in the CGRA.
- The Investment Revaluation Account (IRA):
- The IRA is sub-divided into IRA-foreign securities (IRA-FS) and IRA-rupee securities (IRA-RS).
- The unrealised gains/ losses on revaluation on Rupee securities and oil bonds are accounted for in IRA-RS.
- The unrealised gains/ losses on revaluation on Foreign securities (other than Treasury Bills, Commercial Papers and certain “held to maturity” securities) are accounted for in IRA-RS.
Risk Provisions:
- The Asset Development Fund (ADF):
- The ADF has been created to meet internal capital expenditure and make investments in subsidiaries and associated institutions.
- The Contingency Fund (CF):
- Contingency Reserve represents the amount provided on a year-to-year basis for meeting unexpected and unforeseen contingencies.
- Such contingencies include depreciation in value of securities, exchange guarantees and risks arising out of monetary/exchange rate policy compulsions.
- When CGRA is not sufficient to fully meet exchange losses, it is replenished from the CF.
Why does a central bank need capital?
- The Central banks that have foreign assets need capital to absorb potential losses.
- The RBI needs capital to shield the economy from monetary and financial shocks.
- In case of unstable governments, monetary authorities carry a bigger burden, a Central bank would need more capital in such a situation.
- A central bank needs reserves to perform functions such as price and exchange stability.
- The reserves give independence to a central bank.
Surplus Payable to the Central Government
- Under Section 47 of the RBI Act, 1934 after making provisions for bad debts, depreciation in assets, staff matters etc., the balance of the profits of the Bank is required to be paid to the central government.
News Summary:
- The Reserve Bank of India (RBI) has recently released its annual report.
- RBI has retained a large amount of Rs 73,615 crore within the RBI by transferring it to the Contingency Fund (CF) of the central bank. As a result, the CF has swelled to a new high of Rs 2.6 lakh crore.
- This has lead to a sharp fall in the transfer of surplus to the central government in the current year to 57, 128 crore, from Rs 1.76 lakh crore that it paid to the government last year.
Difference between surplus transfer of last year and this year:
- There is a difference from last year surplus transfer (of Rs 1.76 lakh crore) to this year’s (of 57,000 crore).
- RBI’s transfer this year is as per the economic capital framework (ECF) adopted in 2019 by the RBI board.
- Last year’s surplus transfer included Rs 1.23 lakh crore of dividends due from the previous financial year 2018-19 and Rs 52,637 crore taken out from CF as per the revised ECF.
- Last year, the RBI said that, as the bank’s financial resilience was within the desired range, the excess risk provision amounting to Rs 52,637 crore was written back from Contingency Fund to income, facilitating the transfer of it to the government.
Risk provisions and revaluation accounts of the RBI for 2019-10
Risk Provisions:
- There are two risk provisions of the Reserve Bank, viz., Contingency Fund (CF) and Asset Development Fund (ADF).
- CF: A provision of Rs 73, 615 crore was made towards CF. Accordingly, the balance in CF as on June 30, 2020 was Rs 2.6 lakh crore compared to Rs 1.96 lakh crore as on June 30, 2019.
- ADF: No provision was made for transferring to ADF in the year 2019- 20. Hence, the balance in ADF remains at Rs 22,875 crore as on June 30, 2020.
Revaluation Accounts:
- The unrealised marked-to-market gains/ losses are recorded in the revaluation heads, viz., CGRA, IRA-FS, IRA-RS and FCVA.
- CGRA: During 2019-20, the balance in CGRA increased to 9.7 lakh crore as on June 30, 2020 from Rs 6.6 lakh crore as on June 30, 2019.
- IRA-FS: The balance in IRA-FS increased to about 54, 000 crore as on June 30, 2020 from about 16,000 crore as on June 30, 2019.
- IRA-RS: The balance in IRA-RS increased to about 93, 000 crore as on June 30, 2020 from about 49,000 crore as on June 30, 2019.
