Why there's a need to make Investment Fluctuation Reserve ? Why it is important?

Dear Student

With effect from the 2018-19 fiscal year, banks must set aside adequate reserves for mark-to-market (MTM) losses on AFS and HFT investments. The provisioning for each of these quarters can be spread out evenly over up to four quarters, beginning with the quarter in which the loss occurs.
 
According to RBI guidelines, the provisioning amount cannot be less than the lower of the following: (a) net profit on sale of investments during the year; or (b) net profit for the year less mandatory appropriations.
 
The provision amounts debited to the P&L Account are debited under the heading 'Expenditure – Provisions & Contingencies'. The amount will be transferred to the IFR until the amount is depleted.
The provision amounts debited to the P&L Account are debited under the heading 'Expenditure – Provisions & Contingencies'. The amount shall be transferred to the IFR on a continuing basis until the IFR represents at least 2% of the HFT and AFS portfolio. Where possible, this should be accomplished within three years.

1. When an investment has a market value that is equal to its book value
2. When the market value of an investment is less than the book value of that investment as shown on the Balance Sheet
3. When the market value of an investment exceeds the book value of the investment as shown on the Balance Sheet

Regards

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