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Current Affairs

RBI transfers money to contingency fund

Date: 28 August 2020 Tags: Monetary Policy & RBI

Issue

The Reserve Bank of India (RBI) has retained a whopping amount of Rs 73,615 crore within the RBI by transferring it to the Contingency Fund (CF) of the central bank.

 

Background

 The central bank’s main risk provision accounts – Contingency Fund, Currency and Gold Revaluation Account (CGRA), Investment Revaluation Account Foreign Securities (IRA-FS) and Investment Revaluation Account-Rupee Securities (IRA-RS) — together now amount to Rs 13.88 lakh crore.

 

Details

  • Contingency Fund is a specific provision meant for meeting unexpected and unforeseen contingencies, including 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.

  • The Central Board of the RBI recently approved the transfer of Rs 57,128 crore as surplus or dividend to the Central government for the accounting year 2019-20, sharply lower by 67.5 percent from Rs 1.76 lakh crore that it paid to the government last year.

  • As per Section 47 of the RBI Act, profits or surplus of the RBI are to be transferred to the government, after making various contingency provisions, public policy mandate of the RBI, including financial stability considerations.

  • The government, which was looking for funds to bridge the deficit, sought higher surplus from the RBI pointing out the high reserves/ surplus retained by the RBI.

  • It was initially resisted by the RBI which was then headed by Urjit Patel. The RBI relented later appointed the Bimal Jalan committee to work out the modalities of the transfer.

  • The Currency and Gold Revaluation Account (CGRA) 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.

  • 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.

  • The unrealised gains or losses on revaluation in foreign dated securities are recorded in the Investment Revaluation Account Foreign Securities (IRA-FS).