RBI has set aside Rs.13,140 crore for its Contingency Fund (CF) this year.
This is the part of the reason for the smaller surplus.
What is the necessity of CF?
The RBI says the CF is meant for unforeseen contingencies.
CF exist to cushion against unforeseen fluctuations in forex and gold reserves, losses on its exchange rate operations, valuation losses on bond holdings and risks arising from its supervisory responsibilities.
Today, the RBI’s record forex reserves are vulnerable to an appreciating rupee and an NPA-ridden banking system.
Expert committees have recommended that the RBI hold a minimum 12% of its assets in contingency reserves.
What is the problem with this?
There is a disagreement between RBI and the centre on the level of reserves that a central bank should keep to tide over extreme financial disruptions.
This is because of the differing ways in which the government and the RBI perceive the risks that a central bank anticipates.
The RBI bases its assessment on the results of a sophisticated risk analysis by RBI staff.
The government, on the other hand, considers there is nothing special about the composition of the RBI’s assets.
It feels that the risk to RBI is significantly less compared to its peers.
What should be done?
Centre should avoid treating the RBI as another money supplier like the public sector undertakings that can be tapped to balance its fiscal math.
As risk manager to the economy, RBI is tasked with managing the country’s foreign exchange reserves, ensuring stability in the financial markets and acting as a lender of last resort to the banking system.
It is only fair that it gets to decide on the capital buffers it needs to cushion against these risks.
It is time the Government and the RBI planned out a mutually acceptable distribution policy as they did with the Monetary Policy Framework Agreement.
