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6) Explain the structure of equity holding of RBI and analyze issues related to equity holding of RBI?(250 words)

Topic-  Indian economy : issues

6) Explain the structure of equity holding of RBI and analyze issues related to equity holding of RBI?(250 words)

Indianexpress

Why this question

The article discusses the structure of RBI’s equity holding and examines whether the equity holding of RBI needs to be reduced. The issue has been in news recently and a committee has been formed to examine this issue.

Key demand of the question

The question first expects us to explain the structure of equity holding of RBI and thereafter analyze whether it’s too high and should be reduced. Finally, we need to give a fair and balanced opinion and discuss way forward.

Directive word

Analyze – When asked to analyze, you  have to examine methodically the structure or nature of the topic by separating it into component parts and present them as a whole in a summary.

Structure of the answer

Introduction – Explain why this issue has been in news.

Body

  • Explain that the RBI’s current equity holding is around 27 per cent of its total assets. 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 revaluation capital is an accounting entry that offsets changes in the rupee value of the foreign assets and gold holdings of the RBI due to changes in the exchange rate of the rupee and changes in the dollar price of gold, respectively.
  • Explain what the issue is – total equity of 27 per cent has attracted a lot of attention lately. Arguments have been made that this is too high, especially when compared with other countries and that the RBI should transfer a part of this “excess” capital to the government as a one-time payment.
  • Give rationale for why this equity is needed and whether it needs to be reduced.

Conclusion – Give your view and discuss way forward.

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