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RBI tells banks to create bond fluctuation reserve

The Reserve Bank of India on Thursday asked commercial banks to transfer part of their profits on bond sales to a reserve account as a shield against unexpected price movements.

The RBI instructed banks to build an Investment Fluctuation Reserve Account from gains realised on selling their investments in government securities.

An RBI statement said the guidelines were based on feedback from banks following its mid-year monetary policy review where it stressed the need for prudent policies on utilising such profits and guarding against sharp changes in the interest rate environment.

It said banks should aim to achieve an IFR of at least five per cent of the portfolio within a period of five years and added that they could even build this up to 10 per cent of their portfolio of investments in securities.

Unrealised gains from valuation of securities should not be taken either to the income account or the IFR, it said.

The RBI said the IFR will be eligible for inclusion in Tier-2 capital.

Banks would be allowed to transfer balances from IFR to the profit and loss account to meet the depreciation requirements on investment as a 'below the line' item, it added.

The RBI said it would review the guidelines after one year.

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