Archive for November 20th, 2018

Issues in Measurement of India’s Inflation Targeting

November 20, 2018

Prof Ravindra Dholakia in this new EPW piece questions the CPI as a an indicator for India’s inflation targeting. It is ironical as he is a member of RBI’ Monetary Policy Committee which is central to this IT framework.

He says current CPI overstates inflation:

The current practice of measuring the inflation rate from fixed base weight index is outdated and likely to overstate inflation substantially compared to the chain weighted index used in developed countries. Similarly, the treatment of house rent allowance revisions to estimate the housing Consumer Price Index also significantly overstates the headline inflation. Economy-wide inflationary expectations also need proper measurement.

Inflation-targeting framework without proper measurement of inflation rate can involve very high real costs and make the policy counterproductive.

Well, well, well..


Finally a press release from RBI on its board meeting! (some explanations over what it meant)

November 20, 2018

RBI is mandated as per its Act to have 6 Board meetings every year and one every quarter.

And RBI so far has been informing us of its Board meetings via a short press release. It is not a mandate but a good practice. Ideally, RBI should be sharing much more about the Board meeting and release minutes of sorts. But atleast they tell us something about the Board meeting.

It is amazing how the last time RBI informed us of any such Board meeting was in Feb 2017. I am not saying Board meetings are not held but why public is not informed is something one does not understand.

Anyways, given the enormous hype and built-up over Nov 19 board meeting, RBI did issue a press release finally:

The Reserve Bank of India’s (RBI) Central Board met today in Mumbai and discussed the Basel regulatory capital framework, a restructuring scheme for stressed MSMEs, bank health under Prompt Corrective Action (PCA) framework and the Economic Capital Framework (ECF) of RBI. The Board decided to constitute an expert committee to examine the ECF, the membership and terms of reference of which will be jointly determined by the Government of India and the RBI. The Board also advised that the RBI should consider a scheme for restructuring of stressed standard assets of MSME borrowers with aggregate credit facilities of up to ₹ 250 million, subject to such conditions as are necessary for ensuring financial stability. The Board, while deciding to retain the CRAR at 9%, agreed to extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020. With regard to banks under PCA, it was decided that the matter will be examined by the Board for Financial Supervision (BFS) of RBI.

First, it is really odd that we are not told of who was there at the Board meeting. All previous such releases did tell us the Board members present at the meeting. Given the importance of this meeting, we should know whether only the Board members were there or there were some other invitees.

Second, the content is as brief as it can be. One is expected to read between the lines and even then it is tough.

Third, they agreed on following:

  • As far as issue of whether RBI is overcapitalised and its should give its reserves to the government, they have agreed to form an expert committee. I mean this was always the more sensible route to take given how many committees we anyways form. Why was this allowed to become a matter of fight beats me.
  • One thing is clear, whatever government might make us believe in election campaigns, MSME sector is bleeding. Perhaps demonetisation and GST have played their role in this ailment as well along with other economic conditions. So, the Board has asked RBI to make a scheme for restructuring loans for those MSMEs that have taken aggregate loans worth Rs 25 cr. It has to be seen whether RBI does come up with any such scheme.
  • Whether banks under Prompt Corrective Action (PCA) can be freed a little, has been given to Board for Financial Supervision (BFS) of RBI.
  • The last bit on CRAR (Capital Risk Adjusted Ratio) is interesting. Thanks to Avinash for picking this point much ahead of others.RBI has specified banks to hold CRAR at 9%. The break-up is as follows:
    % of Risk weighted assets
    i Minimum Common Equity Tier 1 ratio 5.5
    ii Capital conservation buffer (comprised of Common Equity) 2.5
    iii Minimum Common Equity Tier 1 ratio plus capital
    conservation buffer [(i)+(ii)]
    iv Additional Tier 1 Capital 1.5
    v Minimum Tier 1 capital ratio [(i) +(iv)] 7
    vi Tier 2 capital 2
    vii Min Total Capital Ratio 9
    viii Minimum Total Capital Ratio plus capital conservation buffer

    The Board has agreed to keep CRAR at 9% but extend the transition period for implementing the last tranche of 0.625% under the Capital Conservation Buffer (CCB), by one year, i.e., up to March 31, 2020. 

    What is CCB? RBI explains:

    The capital conservation buffer (CCB) is designed to ensure that banks build up capital buffers during normal times (i.e. outside periods of stress) which
    can be drawn down as losses are incurred during a stressed period. The requirement is based on simple capital conservation rules designed to avoid
    breaches of minimum capital requirements.

    Therefore, in addition to the minimum total of 8% as indicated in paragraph 
    2.3.1 above, banks will be required to hold a capital conservation buffer of
    2.5% of RWAs in the form of Common Equity to withstand future periods of stress bringing the total Common Equity requirement of 7% of RWAs and total
    capital to RWAs to 10.5%. The capital conservation buffer in the form of Common Equity will be phased-in over a period of four years in a uniform
    manner of 0.625% per year, commencing from January 1, 2016.

So, ideally banks should be building CCB equal to 2.5% by 2019. But they have extended it to 2020. That means both, more time for banks and more funds on disposal.

Hope we get to learn more over these contentious issues in due course of time….


Sorry, forgot to add about Board for Financial Supervision (BFS) of RBI. RBI website explains:

Financial Supervision

The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.


Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.


The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board.

BFS meetings

The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.

BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members.

The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues.


Some of the initiatives taken by BFS include:

  1. restructuring of the system of bank inspections
  2. introduction of off-site surveillance,
  3. strengthening of the role of statutory auditors and
  4. strengthening of the internal defences of supervised institutions.

The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of empanelment and appointment of statutory auditors, the quality and coverage of statutory audit reports, and the important issue of greater transparency and disclosure in the published accounts of supervised institutions.

Current Focus

  • supervision of financial institutions
  • consolidated accounting
  • legal issues in bank frauds
  • divergence in assessments of non-performing assets and
  • supervisory rating model for banks.


From RBI Annual Report 2017-18, BFS had following members:

II. Board for Financial Supervision (BFS)
Urjit R. Patel Chairman 10 9
S. S. Mundra* Vice-Chairman NIL NIL
N. S. Vishwanathan^ Vice-Chairman 10 10
Viral V. Acharya Member 10 10
B. P. Kanungo Member 10 8
M. K. Jain@ Member 1 1
Nachiket M. Mor** Member 9 9
Bharat N. Doshi Member 10 10
Sudhir Mankad Member 10 7
Ashok Gulati Member 10 8
* : Relinquished charge as Deputy Governor on the forenoon of July 31, 2017.
^ : Serving as Vice-chairman of BFS from August 30, 2017 onwards.
** : Appointed as Member of BFS from September 09, 2017 onwards.
@ : Took charge as Deputy Governor from June 22, 2018.

Nachiket Mor is no more part of the Central Board. So he will be replaced. Bharat Doshi and Sudhitr Mankad were part of BFS from 2015-16 and in all lilelihood would have completed their two year term. Ashok Gulati has been there since 2016-17 so may be has some more time to serve. This would mean BFS would have three new members and based on who they are from the current board, it could be interesting.

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