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RBI Proposes Ending IFR
The Reserve Bank of India (RBI) has proposed ending the Investment Fluctuation Reserve (IFR). This change would allow Indian banks to reallocate an estimated ₹40,000 crore to ₹60,000 crore from this reserve into their core capital (Tier 1). Experts believe this could directly add up to 20 basis points to banks' capital. The IFR was historically a buffer against falling bond prices, but regulators now feel current rules might sufficiently manage market risks. The RBI is seeking public feedback on this proposal until April 29.
Market Volatility and Losses
The move comes as India's bond market faces considerable volatility. Yields on the key 10-year government security have recently hovered around 6.9-7.0%, driven by global energy prices and inflation worries. These higher yields have led to significant mark-to-market losses on banks' bond portfolios. Icra estimates these paper losses could reach ₹15,000 crore to ₹20,000 crore for the March quarter alone. The proposed IFR reallocation would help banks absorb these existing losses, rather than freeing up entirely new funds for lending right away.
Banks' Strong Financial Standing
Indian banks are financially sound, with strong capital levels. As of September 2025, their Capital to Risk-Weighted Assets Ratio (CRAR) was about 17.2%, well above requirements. Common Equity Tier 1 (CET1) ratios also stood strong at around 14.8%. This means the IFR reallocation is more about increasing flexibility than fixing a capital shortage. The RBI has previously introduced major reforms like Basel III rules and the Insolvency and Bankruptcy Code (IBC) to strengthen banks. Banks are now preparing for a new accounting standard, the Expected Credit Loss (ECL) framework, set to start in April 2027, which requires solid capital and risk management.
Future Reforms and Challenges
The main immediate effect of removing the IFR is to cover current losses from falling bond values, essentially shifting existing funds into core capital rather than bringing in new money. How much this helps banks lend more depends on their strategies for using this reclassified capital. Even with some deposit growth, lending expansion is faster, creating potential liquidity issues that the RBI is managing. Persistent global tensions and inflation risks mean bond market volatility, and potential losses, could return. Banks also face the major upcoming ECL accounting change in April 2027, which will require strong capital. Therefore, while banks are well-capitalized now, the IFR change mainly helps absorb current financial strain.