RBI New Rules will require commercial banks to follow revised capital requirements for market risk from April 1, 2027.
The Reserve Bank of India has issued the final directions under the revised Basel III framework, covering risks linked to trading, interest rates, equities and foreign exchange.
The new framework is intended to align India’s banking regulations with revised Basel III standards while providing a clearer and more flexible approach for calculating capital requirements against market-related risks.
RBI New Rules Take Effect From April 2027
The RBI’s revised directions will come into effect on April 1, 2027. Banks have therefore been given time to prepare their systems and internal processes for the new capital framework.
The final directions follow the draft guidelines issued by the central bank in February 2023.
The RBI said the revised framework incorporates feedback received during the consultation process.
The framework covers market risks associated with interest rates, equity positions and foreign exchange exposures. Banks will use a Simplified Standardised Approach for calculating market-risk-weighted assets.
Banks Cannot Shift Instruments To Lower Capital Needs
One important change concerns the classification of financial instruments between the banking book and trading book.
Under the revised framework, banks cannot classify an instrument in a particular book simply to benefit from lower capital requirements.
The RBI has specified that where such classification affects capital requirements, banks must account for the resulting difference.
The RBI has also linked the definition of the trading book to its existing investment directions, under which instruments classified as Held for Trading, or HFT, form part of the trading book for capital-adequacy purposes.
Changes In Market Risk Capital Calculation
The revised rules introduce changes in the calculation of capital requirements for several types of market exposure.
For interest-rate risk, specific risk tables have been revised to align with standards issued by the Basel Committee on Banking Supervision.
The RBI has also revised the treatment of debt mutual funds and exchange-traded funds held in the trading book.
Capital requirements will take into account the underlying risk drivers while retaining safeguards under the framework.
The treatment of positions hedged through credit derivatives has also been revised.
The framework includes positions hedged through total return swaps where such transactions are permitted under the applicable RBI directions.
Foreign Exchange Risk Also Covered
The revised framework includes changes related to foreign exchange risk and the Net Open Position.
Banks will be required to meet the applicable capital requirements for foreign exchange risk on a continuous basis, including at the close of each business day.
The RBI has also provided for certain structural foreign-currency positions to be excluded from the Net Open Position calculation if specified conditions are met.
Eligible structural exemptions are to be recalculated quarterly.
Overall, the revised framework changes how banks measure and provide capital against market risks.
The provisions are scheduled to take effect from April 1, 2027, giving banks time to align their capital calculations and risk-management systems with the new requirements.