RBI Removes Mandatory Investment Fluctuation Reserve (IFR) Requirement for Commercial Banks

Introduction

The Reserve Bank of India (“RBI”) has formally discontinued the mandatory Investment Fluctuation Reserve (“IFR”)[1] requirement for commercial banks through the Reserve Bank of India (Commercial Banks – Classification, Valuation and Operation of Investment Portfolio) Second Amendment Directions, 2026.[2]

The amendment removes a longstanding prudential requirement relating to the maintenance of IFR by commercial banks and also eliminates certain conditions governing the inclusion of quarterly profits in Capital to Risk-weighted Assets Ratio (“CRAR”) calculations. The move forms part of the RBI’s broader effort to simplify the regulatory framework governing investment portfolios and capital management.

Rationale for the Discontinuation

RBI Governor Sanjay Malhotra explained that market prices, as reflected through mark-to-market valuation, should be fully recognized as they provide a more accurate representation of a bank’s financial position. The IFR was originally introduced to mitigate volatility arising from fluctuations in investment portfolio values. However, with the implementation of revised investment valuation norms and the incorporation of Basel III capital requirements for market risk, the RBI considered the reserve requirement to have become less relevant.

RBI officials have also highlighted concerns regarding the lack of uniformity in the treatment of different categories of banks, with varying requirements and levels of compliance often leading to supervisory observations. The removal of the IFR requirement is therefore intended to promote greater consistency and simplify the overall regulatory framework.

Existing Framework and Key Changes

Prior to the amendment, commercial banks were required to maintain an Investment Fluctuation Reserve equivalent to at least 2% of their Available for Sale (“AFS”) and Fair Value Through Profit and Loss (“FVTPL”) investment portfolios. The reserve functioned as a prudential buffer against losses arising from fluctuations in bond prices and helped absorb valuation-related volatility.

In addition, under the earlier CRAR framework, commercial banks were permitted to include quarterly profits in CRAR calculations only if incremental provisions for Non-Performing Assets (“NPAs”) in any of the four quarters did not deviate by more than 25% from the annual average.

Under the revised framework, existing IFR balances maintained by commercial banks may be transferred to the Statutory Reserve, General Reserve, or Profit and Loss balance and may be recognized as part of Tier 1 capital, subject to the applicable regulatory framework. The provisions governing the operation and maintenance of the IFR have also been removed from the regulatory directions.

Continued Applicability to Other Banking Categories

While the IFR requirement has been removed for commercial banks, it continues to apply to certain categories of specialised banking institutions.

For payments banks, the IFR has been retained in a modified form owing to the nature of their operations and investment portfolios. Payments banks are required to continue building the reserve from realised gains on the sale of investments, subject to the availability of net profits, until the reserve reaches at least 2% of their AFS and FVTPL portfolios, assessed annually.

Similarly, small finance banks and regional rural banks remain subject to separate regulatory frameworks and are not covered by the full removal applicable to commercial banks.

Regulatory Significance

The discontinuation of the IFR requirement, together with the removal of the NPA provisioning-linked condition for inclusion of quarterly profits in CRAR calculations, provides commercial banks with greater flexibility in capital management.

The amendments simplify compliance requirements, reduce regulatory complexity, and allow banks greater discretion in managing reserve balances previously earmarked for IFR purposes. The framework also reflects the RBI’s increasing reliance on mark-to-market valuation principles and existing prudential capital requirements to address market risk.

From a regulatory perspective, the changes contribute to a more streamlined framework for investment portfolio management while seeking to maintain appropriate prudential safeguards through the broader capital adequacy regime.

Conclusion and Way Forward

The RBI’s decision to discontinue the mandatory IFR requirement marks an important development in the prudential regulation of commercial banks. By removing a reserve requirement that had become less significant in light of evolving valuation norms and capital regulations, the RBI has simplified the regulatory framework governing investment portfolios and capital management.

For commercial banks, the amendments provide greater flexibility in the utilization of reserve balances and reduce compliance burdens associated with maintaining the IFR. Going forward, banks should review their capital planning, reserve management policies, and regulatory reporting processes to ensure alignment with the revised framework and assess the implications of the changes on their capital management strategies.

[1] IFR is a dedicated financial buffer created out of profits to absorb potential losses from unexpected declines in the market value of investments. It acts as a shock absorber, protecting both institutions and businesses from having to immediately write down losses against their current-year earnings.

[2] Notifications – Reserve Bank of India, https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=13450 (last visited Jun 5, 2026).

Last Updated on 17 June, 2026