RBI Issues Draft Rules to Revamp Capital Charges for Foreign Exchange Risk

The Reserve Bank of India (RBI) has released a draft framework introducing revised rules for calculating capital charges for foreign exchange (forex) risk. The draft aims to bring India’s currency risk management practices closer to international standards.

It specifies that banks must undertake continuous computation of forex risk capital requirements at both consolidated and standalone levels. The proposed rules are scheduled to take effect on April 1, 2027.

New Framework for Continuous Capital Computation

The draft mandates that banks compute capital requirements for foreign exchange risk on a continuous basis. It states that assessments must be made at both consolidated and standalone levels to ensure comprehensive oversight.

The RBI emphasised that these changes are intended to strengthen the risk governance framework across all banking entities. The regulator noted that the new approach ensures greater alignment with global prudential norms.

Amendments To Net Open Position Calculations

According to the draft, the RBI has proposed amendments concerning the methodology for calculating net open positions and the associated capital charge. These changes aim to improve measurement accuracy and ensure banks capture all relevant exposures.

The RBI has invited public comments on the draft, allowing stakeholders to provide inputs before finalisation. The regulator stressed that these updates reflect evolving international risk management standards.

Daily Capital Maintenance Requirement

The draft also requires banks to maintain capital for foreign exchange risk at the close of every business day. This ensures ongoing coverage of currency‑related exposures and prevents gaps that may arise from intraday movements.

The RBI highlighted that this requirement enhances the responsiveness of banking institutions to rapid changes in currency markets. The rule underscores the central bank’s focus on maintaining robust capital buffers.

Treatment Of Structural Foreign Exchange Positions

The RBI has permitted banks to exclude certain “structural” foreign exchange positions from their net open position calculations. Such exclusions are allowed only under strict conditions and require appropriate justification.

The methodology used must be formally documented within the institution’s risk management policy. The draft notes that these structural positions typically arise from long‑term strategic exposures.

Read More: India Reduces US Treasury Holdings by 21% in 2025 Amid Global Uncertainty.

Conclusion

The RBI’s proposed rules mark a significant update to India’s foreign exchange risk management framework. By mandating continuous assessment, daily capital maintenance, and clearer methodologies, the central bank seeks stronger compliance and alignment with international standards.

The consultation process is expected to refine the draft before its implementation on April 1, 2027. These changes aim to enhance transparency and improve risk‑governance practices across the banking sector.

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