To assess whether the Reserve Bank of India is overcapitalised, two approaches are employed. First, the methodology and risk tolerance parameters used by major central banks are applied to the RBI’s balance sheet. Second, a simple cross-country econometric framework relating optimal capital to its possible determinants is used. Both suggest (conservatively) that the RBI has substantial excess capital—in excess of ₹4.5 lakh crore—which could be profitably deployed elsewhere, not for financing general government operations or the deficit but, for example, to recapitalise the public sector banks conditional on them being reformed.
