RBI Removes Investment Fluctuation Reserve to Boost Bank Capitals

The Reserve Bank of India has decided to eliminate the Investment Fluctuation Reserve (IFR) that commercial banks maintain as a safety net against investment value depreciation. This move aims to enhance the capital adequacy of banks while simplifying regulatory requirements. New guidelines are proposed for public consultation.

The Reserve Bank of India announced on Wednesday the removal of the Investment Fluctuation Reserve (IFR) requirement, a buffer maintained by banks to counter depreciation risks in investment values. This regulatory shift aims to bolster the capital adequacy of lenders by allowing such funds to be reallocated as Tier 1 capital.

Commercial banks, which already maintain a capital charge for market risk, will no longer be subject to maintaining this reserve. The Reserve Bank stated that outstanding IFR balances would be transferred to statutory reserves or profit and loss accounts, a move expected to streamline operations and clarify regulations.

Additionally, RBI Governor Sanjay Malhotra suggested removing constraints on including quarterly profits in capital calculations, a proposal under review for public feedback. These revisions are part of a series of draft amendments meant to enhance regulatory transparency and consistency across banking categories.

(With inputs from agencies.)