RBI IFR rule change: The Reserve Bank of India’s decision to discontinue the Investment Fluctuation Reserve for commercial banks releases a buffer that had outlived part of its purpose. Banks had built the IFR from realised gains on sale of investments to absorb mark-to-market losses during periods of interest-rate volatility. RBI now appears satisfied that investment valuation rules and market-risk capital charges can do that job without a separate ring-fenced reserve.
The change does not bring fresh money into banks. It frees money already sitting inside their balance sheets. Existing IFR balances can move below the line to statutory reserve, general reserve, or profit and loss balance. The effect will show up unevenly because banks did not carry the same IFR load, nor did they have the same Tier-1 capital base.
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RBI IFR rules and bank capital
The useful way to read the change is not by the absolute IFR balance, but by the size of that balance against Tier-1 capital. The Influx Ratio, defined as IFR divided by Tier-1 capital, captures the relative gain from the RBI decision. A higher number means the bank gets a larger usable lift from the same regulatory change.
On FY24 numbers, private and public sector banks both appear among the main beneficiaries. Kotak Mahindra Bank had an Influx Ratio of 3.98%, followed among private banks by Dhanlaxmi Bank at 3.29% and Nainital Bank at 2.99%. Public sector banks were close behind, with Central Bank of India at 3.55%, State Bank of India at 3.00%, and Punjab and Sind Bank at 2.87%.
By FY25, the pattern had shifted towards public sector banks near the top. CSB Bank led with 4.05%, followed by Kotak Mahindra Bank at 3.65% and Nainital Bank at 2.57%. Among PSBs, Indian Bank stood at 3.08%, Central Bank of India at 2.92%, and Punjab and Sind Bank at 2.87%. The large private banks, HDFC Bank, ICICI Bank, and Axis Bank, remained in a narrow and lower band of about 1.18% to 1.80%.
PSB capital gains from IFR relief
The public sector bank gain is easier to understand from their balance sheets. PSBs hold large government securities portfolios because of their deposit base, statutory liquidity requirements, and the caution that followed the bad-loan cycle of the 2010s. In several banks, investment books remained large even after credit demand recovered.
The old IFR rule therefore tied up a larger pool of capital for banks with heavier treasury books. PSBs also entered the period after the NPA clean-up with weaker retained earnings than the best private banks. Loan provisioning had eaten into profits, and several banks relied on government capital rather than internally generated equity. A large IFR balance against a thinner Tier-1 base produces a higher Influx Ratio.
This does not mean every PSB has gained equally. The benefit depends on the size of the investment book, the realised gains previously transferred to IFR, and the current Tier-1 base. But the direction is clear. Banks that combined large government securities holdings with modest capital cushions receive a more visible lift.
Private banks see a smaller IFR lift
The large private banks sit at the other end. Their profitability has allowed them to build Tier-1 capital through retained earnings. Their capital base is larger, so any IFR release gets diluted in the ratio. Their treasury books have also been managed with more attention to interest-rate volatility, including greater use of held-to-maturity classification where available.
The more interesting private-bank cases are mid-sized lenders. Kotak Mahindra Bank’s high ratio shows that IFR relief is not only a PSB story. Mid-cap private banks that had accumulated IFR from treasury gains, or used provisions to smooth earnings, now get a visible release.
Kotak Mahindra Bank’s FY25 numbers illustrate the point. It reported profit on sale of investments of ₹4,539 crore and also raised provisions and contingencies sharply. The bank kept net profit growth steady while absorbing part of the treasury gain through provisions. RBI’s move now gives such lenders more balance-sheet flexibility.
Credit-deposit ratio keeps the change relevant
The timing helps banks. Credit growth has run ahead of deposit mobilisation, pushing credit-deposit ratios higher and forcing banks to compete harder for deposits. IFR relief gives banks some non-dilutive space to support lending without immediately raising higher-cost deposits or equity.
That space is useful, but limited. It will not solve the deposit problem. Nor does it change the basic risk in shifting from government securities to loans. A bank can improve net interest margins by moving part of its surplus G-sec book into higher-yielding credit or State Development Loans, but only if asset quality holds.
The RBI has removed a separate prudential ring-fence. It has not removed market risk, credit risk, or the need for deposit growth. The winners will be banks that use the release to improve capital efficiency without treating it as a substitute for balance-sheet discipline.
Krishang Worah is an undergraduate student, and Dr Gargee Sarmah is Assistant Professor at CHRIST University, Bangalore Campus.