Explanation:

? The Reserve Bank of India (RBI) has developed an Economic Capital Framework (ECF) for determining the allocation of funds to its capital reserves so that any risk contingency can be met and as well as to transfer the profit of the RBI to the government.
? The Reserve Bank of India (RBI) has developed the Economic Capital Framework (ECF) to provide an objective, rule-based, transparent methodology for determining the appropriate level of risk provisions to be made under Section 47 of the Reserve Bank of India Act, 1934. The framework was developed in 2014–15, and while it was used to inform the risk provisioning and surplus distribution decisions for that year, it was formally operationalized in 2015–16.
? RBI’s Contingency Risk Buffer (CRB) is, inter alia, the country’s savings for a ‘rainy day’ (a financial stability crisis) which has been consciously maintained with RBI in view of its role as Lender of Last
Resort (LoLR). Financial stability risks are those rarest of the rare, fat tail risks whose likelihood can never be ruled out, especially in light of the Global Financial Crisis (GFC) and whose impact can be potentially devastating. In this context, some of the risks posed to the RBI are:
o Gold Price Risk: The gold reserves are seen as strategic assets and not actively managed. The gold price risk, therefore, is fully provisioned for. For example, this risk resulted in a valuation loss of (-) ?16,370 crore in 2012–13 due to a decrease in the gold price.
o Currency Risk: The most significant impact of public policy considerations on the RBI’s balance sheet is the size of the forex reserves maintained to manage the volatility in the exchange rate. The RBI suffers losses when the rupee appreciates against the USD and/ or the other currencies in its forex portfolio and it gains when the rupee depreciates against them. Thus, counter-intuitively, the RBI suffers valuation losses during times when the economy is witnessing strong growth and large capital inflows which normally are associated with rupee appreciation.
o Interest Rate Risks: In addition to currency risks, the RBI has significant interest rate risks on both its forex as well as its domestic securities portfolio. While the RBI does actively manage the interest rate risk on its forex portfolio, this is not possible in the case of the domestic portfolio as such operations could conflict with monetary policy operations. When there are differences in real interest rates between two countries that allow for the flow of financial capital, that capital flows to the country with the relatively higher real interest rate and out of the country with the relatively lower real interest rate. Therefore a decrease in the USA federal reserve interest rates compared to domestic interest rates will lead to inflows of capital in India.
o Open Market Operations (OMO): The effect of Liquidity Adjustment Facility (LAF) and OMO on the balance sheet depends on the purpose of the action. If OMOs are conducted to increase the reserve money, it increases the size of the RBI’s balance sheet. In case these are done for sterilization purpose (mopping up the liquidity impact of capital inflows), it contracts the balance sheet.
? Hence option (a) is the correct answer.