What is Economic Capital framework (ECF)? Discuss the Challenges and risks in operationalising ECF in the light of independence of RBI? (200 Words)
Refer-The Indian Express
Enrich the answer from other sources, if the question demands.
IAS Parliament 5 years
. Economic Capital Framework
· The economic capital framework means the capital that an institution requires or needs to hold as a counter against unforeseen risks or events or losses in the future.
Challenges with respect to the independence of RBI
· Weak balance sheet could force the central bank to rely more on excessive seigniorage income(the profits earned by issuing currency which is passed on to the owner of the central bank), which would run in conflict to its price stability mandate
· To build such large capital buffers they have to approach their governments for beefing up their capital or for recapitalisation(erosion of independence)
· Unclear over the transfer of surpluses from RBI to Government.
Economic Survey 2016-17 said the RBI was already exceptionally highly capitalised and nearly Rs 4 lakh crore of its capital transfer to the government can be used for recapitalising the banks and/or recapitalising a Public Sector Asset Rehabilitation Agency.
Risks
· Interest rate risk — when interest rates either move up or slide, depending on the price of which securities or bonds held by a central bank or banks can be impacted
· Operational risk — when there is a failure of internal processes.
· Credit risk — when there could be a potential default by an entity
· Foreign exchange risks - the valuation of the foreign securities it holds against a huge pile of foreign exchange reserves
· Clearly these risks affect the independent functioning of RBI.
