On issuance of draft amendment directions in 2026, the Reserve Bank of India proposed significant changes to the investment framework for Local Area Banks by discontinuing the Investment Fluctuation Reserve (IFR). Exercising powers under Section 35A of the Banking Regulation Act, 1949, the RBI directed that any existing IFR balance be reclassified as Tier 1 capital, thereby strengthening banks’ core capital base. The balance is required to be transferred “below the line” to reserves such as Statutory Reserve, General Reserve, or Profit & Loss balance. Consequentially, paragraphs governing IFR requirements (paras 105–107) are proposed to be deleted. The amendment reflects evolving prudential norms relating to market risk and investment portfolios and aims to simplify regulatory requirements while enhancing capital adequacy transparency. The directions will take effect upon notification on the RBI’s official website and are currently open for stakeholder comments.
Reserve Bank of India
RB I/2026-27/
DOR.MRG.REC.No. /00-00-001/2026-27 | Dated: XX, 2026
Reserve Bank of India (Local Area Banks – Classification, Valuation, and
Operation of Investment Portfolio) Amendment Directions, 2026 — Draft for
Comments
Please refer to paragraph 104 of Reserve Bank of India (Local Area Banks Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025, dated November 28, 2025, on Investment Fluctuation Reserve (IFR). In view of the developments in the prudential frameworks governing market risk and investments for Local Area Banks, there is a need to amend the extant instructions.
2. Accordingly, in exercise of the powers conferred by Section 35A of the Banking Regulation Act, 1949 (hereinafter called the Act) and all other laws enabling the Reserve Bank in this regard, the Reserve Bank, being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues the Amendment Directions hereinafter specified.
3. (i) These Directions shall be called the Reserve Bank of India (Local Area Banks —Classification, Valuation, and Operation of Investment Portfolio) Amendment Directions, 2026.
(ii) These Amendment Directions shall come into effect on the day these are placed on the official website of the Reserve Bank.
4. The Reserve Bank of India (Local Area Banks Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025,, are amended as provided below.
(i) Paragraph 104 shall be substituted by the following, namely: –
“104. The requirement of Investment Fluctuation Reserve (IFR) has been discontinued. A bank shall treat the outstanding balance in the IFR as Tier 1 capital.
For this purpose, the balance in the IFR shall be transferred ‘below the line’ to Statutory Reserve, General Reserve, or Balance of Profit & Loss Account.”.
(ii) Paragraphs 105 to 107 shall be deleted.
(Sunil T S Nair)
Chief General Manager
