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Banks advised to boost rate buffer

Mumbai, Dec. 5: The Reserve Bank of India (RBI) has asked banks to quickly build up investment fluctuation reserves so that they are in a better position to tackle any interest rate volatility.

In its monetary and credit policy in April, RBI had advised banks to build up a reserve of a minimum 5 per cent of their investments in the held for trading (HFT) and available for sale (AFS) categories in five years.

As the risk perceptions of individual banks could differ according to their portfolio compositions, they were also encouraged to build investment fluctuation reserves up to a maximum of 10 per cent with the approval of their boards.

However, a circular issued by the apex bank said though banks have time up to March 2006, they are urged to quickly build up investment fluctuation reserves to be better positioned to meet interest rate risks.

Last month, the central bank in its Trend and Progress of Banking in India, 2002-03 had alerted banks against the possibility of an interest rate risk as they continue to hold government securities well above the statutory requirements. RBI had asked banks to make provisions and build up reserves to hedge against such a risk.

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