WHY RBI SENT RS 73,615 CRORE TO RBI’S CONTINGENCY FUND?

Focus: GS-III Indian Economy

Introduction

The Reserve Bank of India (RBI), the government’s banker, 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, thus leading to a sharp fall in the transfer of surplus to the government in the current year.

The central bank has the following main risk provision accounts –

1. Contingency Fund,
2. Currency and Gold Revaluation Account (CGRA),
3. Investment Revaluation Account Foreign Securities (IRA-FS) and
4. Investment Revaluation Account-Rupee Securities (IRA-RS)

What is the Contingency Fund (CF)?

This 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.

Not to be confused with Contingency Fund of India

• The Contingency Fund of India is established by the parliament by the Contingency Fund of India Act 1950, under Article 267 of the Indian Constitution.
• The fund is held by the Finance Secretary (Department of Economic Affairs) on behalf of the President of India and it can be operated by executive action.
• The Contingency Fund of India exists for disasters and related unforeseen expenditures.
• Approval of the Parliament of India for such expenditure and for withdrawal of an equivalent amount from the Consolidated Fund is subsequently obtained to ensure that the corpus of the Contingency Fund remains intact.

What did the government get as surplus this year?

• 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 per cent from Rs 1.76 lakh crore that it paid to the government last year.
• As per 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.

What’s the CGRA account?

• 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.

What are IRA-FS and IRA-RS accounts?

• The unrealised gains or losses on revaluation in foreign dated securities are recorded in the Investment Revaluation Account Foreign Securities (IRA-FS).
• Similarly, the unrealised gains or losses on revaluation is accounted for in Investment Revaluation Account-Rupee Securities (IRA-RS).

-Source: Indian Express