Investment Fluctuation Reserve (IFR) is a type of reserve fund that is suggested by the Reserve Bank of India (RBI) to be created by banks and financial institutions. The purpose of creating an IFR is to provide a buffer against fluctuations in the value of a bank's investment portfolio.
As per RBI guidelines, banks are required to create an IFR to the extent of 5% of their investments held in the Available-for-Sale (AFS) and Held-for-Trading (HFT) categories. This reserve is expected to be built up over a period of three years, and any shortfall in the IFR should be made good in subsequent years.
The IFR can be utilized by banks to make up for any shortfall that may arise on account of depreciation in the value of their investment portfolio. It can also be used to absorb losses that may arise due to the sale of investments at a loss or due to the redemption of investments at a lower value than their cost.
Overall, the creation of an IFR is a prudential measure recommended by the RBI to ensure that banks and financial institutions are adequately prepared to manage the risks associated with fluctuations in the value of their investment portfolio.
