RBI Risk Provisioning

RBI Risk Provisioning

Subject: Economy

Section: Monetary Policy

Context:

The six-fold increase in RBI’s transfer to the Contingency Fund reduced the central bank’s surplus transfer to the government.

Central bank’s risk provision:

The central bank’s main risk provision accounts are –

• Contingency Fund–
  • This is a specific provision meant for meeting unexpected and unforeseen contingencies
  • It includes among other things-depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks and any risk arising on account of the special responsibilities enjoined upon the Reserve Bank.
  • Section 47 of the RBI Act states-Profits or surplus of the RBI are to be transferred to the government, after making various contingency provisions.
• Currency and Gold Revaluation Account (CGRA)–
  • It is maintained by the Reserve Bank to take care of currency risk, interest rate risk and movement in gold prices. 
  • Unrealised gains or losses on valuation of foreign currency assets (FCA) and gold are not taken to the income account but instead accounted for in the CGRA.
  • Net balance in CGRA, varies with the size of the asset base, its valuation and movement in the exchange rate and price of gold.
  • 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.
  • When CGRA is not sufficient to fully meet exchange losses, it is replenished from the CF.
• Investment Revaluation Account Foreign Securities (IRA-FS)–
  • The unrealised gains or losses on revaluation in foreign dated securities are recorded in the Investment Revaluation Account Foreign Securities (IRA-FS)
• Investment Revaluation Account-Rupee Securities (IRA-RS)-
  • The unrealised gains or losses on revaluation is accounted for in Investment Revaluation Account-Rupee Securities (IRA-RS).