The Reserve Bank of India has amended its capital adequacy directions for All India Financial Institutions by replacing the methodology for calculating Net Open Position and the capital charge for foreign exchange risk. The revised framework is intended to align the treatment more closely with international standards and to standardize implementation across AIFIs. From April 1, 2027, AIFIs must measure foreign exchange risk and maintain the related capital charge at both consolidated and standalone level on a continuous basis at the close of each business day. The revised rules exclude from foreign exchange risk capital positions deducted from regulatory capital, including related hedges, as well as capital instruments deducted from capital or risk weighted at 1250 per cent and securities that have matured but remain unpaid or have been classified as non-performing, which instead attract credit risk capital. They also allow AIFIs to exclude certain structural non-dealing foreign currency positions, including capital investments and accumulated or unremitted surplus in overseas subsidiaries, joint ventures, associates, branches, IFSC Banking Units and Offshore Banking Units in Special Economic Zones, if specified conditions are met. Those conditions include limiting the exclusion to the amount needed to neutralize capital ratio sensitivity to exchange-rate moves, applying it consistently for at least six months, documenting it for supervisory review and recalculating the exemption quarterly using the Common Equity Tier 1 ratio on a quarter-end basis. For measurement, AIFIs must include all foreign currency positions, including gold, across both the trading book and banking book, with detailed treatment for spot, forward, swap, option and overseas operation exposures. The overall Net Open Position must be calculated using the shorthand method, based on spot rates from financial benchmarks administered by benchmark administrators authorized under the relevant FMRD directions, and the capital requirement is set at 9 per cent of the overall Net Open Position in addition to other applicable capital charges. AIFIs that are subject to the Master Direction on Risk Management and Inter-Bank Dealings must continue to follow that framework for other Net Open Position instructions, including reporting and applicable limits.
Reserve Bank of India2026-06-24
Reserve Bank of India revises AIFI foreign exchange risk capital rules with structural position exclusions from April 2027
The Reserve Bank of India has replaced the AIFI methodology for calculating Net Open Position and foreign exchange risk capital, with effect from April 1, 2027. AIFIs must calculate the charge daily at standalone and consolidated level, may exclude certain structural foreign currency positions subject to conditions, and must hold capital equal to 9 per cent of the overall Net Open Position under the shorthand method.