From the Viewsroom

Prepping for contingencies

Lokeshwarri S K | Updated on September 02, 2018

The RBI must be lauded for reviving Contingency Fund transfers

It’s good that the RBI is continuing to build the Contingency Fund (CF) this year too. This is a kitty that the central bank has built over the years to meet unexpected exigencies that can arise due to sharp fluctuation in the value of securities held by it, to meet risks from monetary or exchange rate policies of central banks or other systemic risks. The RBI’s recent annual report revealed that it had transferred ₹14,190 crore to this fund on June 30, 2018; slightly higher than the ₹13,140 crore transferred last year.

While the RBI had been transferring a chunk of its surplus to the contingency fund up to 2012-13, these transfers temporarily ceased thereafter. No explanation had been given for this change in policy then. It may be assumed that the balance accumulated in this fund was viewed as adequate by the central bank in 2014. Thankfully, the transfers resumed from 2016-17 and this prudential policy continues in 2017-18. While domestic assets accounted for 23.18 per cent share in the RBI’s balance sheet, foreign currency assets and gold constituted 76.82 per cent as on June 30, 2018. Given the heightened worries of turbulence in global financial markets due to the ongoing trade war, explosive political situation in the US and the threat of value erosion to currencies of emerging economies, the value of the RBI’s foreign currency assets are at a greater risk, at this juncture. Also, the cover provided by the CF to the RBI’s assets has been declining since 2012-13, with the central bank temporarily halting the transfers.

While the transfer to the CF last year was around one-third of its disposable income, before accounting for the transfer to CF, the transfer this year was a lower 21 per cent. But the RBI must be lauded for sticking to its resolve to continue the transfers, despite the pressure it faces to transfer funds to the Centre, to help bridge the fiscal deficit.

Lokeshwarri SK Associate Editor and Chief of BL Research Bureau

Published on September 02, 2018

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