SBI won't need IFR buffer

State Bank of India (SBI) will not be required to dip into its investment fluctuation reserve (IFR) to ward off the impact of rising government security yields on its investment portfolio, said A K Purwar, the bank's chairman. Since the start of this financial year, yield on the benchmark 10-year gilt rose by about 150 basis points.

"SBI will not have to utilise the IFR. We still have cushion to absorb further rise in interest rates," Purwar said. He refused to quantify the bank's unrealised gains from its bond portfolio. Currently, the bank has Rs 4,000 crore in IFR and Rs 1,85,000 crore in bonds.

As per the Reserve Bank of India (RBI) guidelines, banks have to create IFR to cushion any blow arising from interest rates spikes. They are required to mark 75 per cent of their investment portfolio to the market, and are needed to keep 5 per cent of their bond portfolio as IFR. When interest rates rise, they are allowed to tap the IFR to take care of the impact on their investment book.

Some of the banks are planning to utilise the IFR to take care of the trading losses they are likely to incur in the current financial year following the rise in interest rates.

"Due to the rise in interest rates in the last quarter there was an impact of Rs 2,200 crore on our investment portfolio which would have been a loss. But SBI changed its accounting pattern for the evalutaion of the bond portfolio from a more conservative one to avert this," Purwar said.

He added that the interest rates will stabilise in the short term. "In the medium term, it is difficult to say. Yield on the ten-year government paper may come down," he said.

The yield on the benchmark gilt closed as high as 6.5 per cent on Thursday on worries over inflation. The bond market's views are mixed on where it will head. Purwar said the headline inflation rate had to be brought down. The headline inflation rate ended higher at 7.96 per cent for the week ended August 20, compared with 7.52 per cent previously.