Banks told to beef up investment fluctuation reserve

Reserve Bank of India (RBI) is understood to have told bankers on Saturday to make sustained efforts to build up their investment fluctuation reserves.

This is to help offset any rise in interest rates down the line. Banks have to build up their investment fluctuation reserves to contend with the interest rate risk on the investment portfolio.

As per the RBI guidelines, all banks are required to build a reserve amounting to five per cent of their respective investment portfolio by 2006. The RBI has also specified that if the banks feel the need, they may build up reserves to the tune of 10 per cent of the investment portfolios.

However, gilt investments kept under "held to maturity" category are exempt from this reserve as they are not exposed day to day market risk.

According to dealers, the interest rates in the next fiscal could see a rise reversing the soft trend seen for almost two years.

Locally, the rate revision is supported in the domestic market by rising inflation and buoyancy in credit growth, while globally the case is justified by the fact that central banks in most of the developed economies have already revised their base rates upwards.

In the United States as well, except for the payroll data, other fundamentals seem to be pointing towards a recovery.