RBI's New Capital Framework: Strengthening Financial Resilience and Balancing Fiscal Health

The RBI has revised its Economic Capital Framework (ECF) to strengthen financial resilience and support government finances. The new framework expands the monetary and financial stability risk buffer from 4.5-5.5% to 3.5-6.5% and introduces a flexible contingency risk buffer. The changes aim to balance the RBI's need for robust buffers with supporting government finances through surplus transfers.

The Reserve Bank of India (RBI) has recently revised its Economic Capital Framework (ECF) to enhance financial stability and support government finances. This significant move comes as the RBI aims to balance its need for robust buffers with the requirement to transfer surplus funds to the government.

The new ECF expands the monetary and financial stability risk buffer from 4.5% to 6.5% of the balance sheet, providing the Central Board with more flexibility to respond to macroeconomic risks. Additionally, the Contingent Risk Buffer (CRB) has been revised to a range of 6% ± 1.5%, allowing for a more adaptive approach to risk management.

The ECF, originally formulated based on recommendations from the Bimal Jalan Committee in 2019, has been subject to a five-year periodic review. This review, which marks the first such exercise since the framework's adoption, has been necessitated by changes in macroeconomic conditions and shifts in the central bank's asset profile.

The revised framework introduces operational flexibility, enabling the RBI to maintain a resilient balance sheet while effectively supporting the government's fiscal needs. The ECF now mandates that surplus transfers to the government will only occur if the RBI's available equity exceeds 7.5% of the balance sheet size, after accounting for any shortfall in market risk buffers.

The changes in the ECF underscore the RBI's commitment to maintaining financial prudence while adapting to changing economic dynamics. With enhanced flexibility in risk provisioning and surplus distribution, the new framework aims to balance the dual objectives of central bank resilience and fiscal support to the government.

References:
[1] https://www.nextias.com/ca/current-affairs/24-05-2025/rbi-revised-economic-capital-framework
[2] https://www.news18.com/business/economy/rbi-has-revised-economic-capital-framework-what-is-this-what-has-changed-all-you-need-to-know-ws-l-9350566.html
[3] https://www.financialexpress.com/policy/economy-rbi-to-infuse-additional-rs-36000-crore-into-financial-system-via-govt-bonds-3858520/
[4] https://www.drishtiias.com/daily-updates/daily-news-analysis/economic-capital-framework-and-rbi-s-dividend-transfer