RBI’s move to scrap investment buffer could lift banks’ capital

Mumbai: The central bank proposal to scrap the Investment Fluctuation Reserve (IFR) will help banks recoup the mark-to-market (MTM) losses they suffer on their bond portfolios due to the recent sharp rise in yields, with the capital positions for mainstream lenders climbing up to 20 basis points.

One basis point is a hundredth of a percentage point.

Analysts said as much as ₹40,000 crore to ₹60,000 crore of accumulated reserves would get transferred to Tier I capital, although the gains could reflect on banks’ books only in FY27. Yields had crossed 7% for the benchmark 10-year paper toward the latter half of the March quarter, widening the spread over the policy rate.

The IFR is an additional buffer of 2% of outstanding investments that banks must maintain daily to cushion against fluctuations in bond prices. The RBI has now proposed to discontinue the requirement of IFR and permit them to treat this buffer as Tier 1 capital. Effectively, the balance in the IFR may be transferred to statutory reserve, general reserve, or balance of profit & loss account. Public comments have been invited to the draft by April 29.

Karthik Srinivasan, group head, financial sector ratings, Icra, said the rating company estimates that MTM losses for banks in the quarter ended March could be about ₹15,000 crore to ₹20,000 crore.

“But assuming that these new IFR norms are effective from the first quarter of this fiscal, the gains to Tier 1 capital could be at least ₹40,000 crore which in a way is available for banks to lend. So net-net one can assume that banks are benefitting from this measure and increase in capital can potentially lead to higher lending opportunities,” Srinivasan said.

The IFR is scrapped just when banks are likely to show MTM losses in their treasury books with yield on benchmark 10-year government security hardening 45 basis points to 7.04% at the end of March 2026 from 6.59% at the end of December 2025.