unacademy 23rd January 2019 Important Editorial Discussion(The Bank's Balance) Presented By: Prabhakar Jha
A brief look at RBl's equity holdings and the structure of its holdings: This overall equity level can be divided into four categories: Paid-up capital, contingency capital, revaluation capital and asset development fund The two largest components of these are contingency capital (6.6 per cent) and revaluation capital* (around 20 per cent) The RBI's current equity holding is around 27 per cent of its total assets.
First, putting a part of the country's assets in a protected entity like the central bank builds fiscal credibility of the country as long as the central bank is viewed by markets as being independent of the government. This can improve the country's international credit rating Should the RBI pay up its excess capital to the Government? Second, mandating payments from the capital of the central bank creates a policy moral hazard. More generally, legislating payments out of the central bank's excess capital will tend to compromise its operational independence in achieving its policy mandate
. The article recommends that a formal agreement between the government and the RBI is made. . The agreement should stipulate: (a) a target band for the equity level of the RBI based VaR computations*; (b) the time frame within which the RBI needs to bring its capital level back within the band every Recommendations (in this article) for the committee currently looking into the RBI's capital structure: time the bounds of the band are breached and (c) explicitly prohibit any payments to the government that is based on the equity level of the RBi.
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