Prudential Norms on Capital Adequacy for All India Financial Institutions

RBI/2026-27/161 DOR.MRG.REC.No.147/21-01-002/2026-27 June 24, 2026

Reserve Bank of India (All India Financial Institutions (AIFIs) – Prudential Norms on Capital Adequacy) Fourth Amendment Directions, 2026

Please refer to Annex I of the FMRD Master Direction - Risk Management and Inter-Bank Dealings (Master Direction No. 1/2016-17 dated July 5, 2016) and paragraph 192 (Section D.4) of the Reserve Bank of India (All India Financial Institutions (AIFIs) – Prudential Norms on Capital Adequacy) Directions, 2025 dated November 28, 2025, which specify the methodology for computation of Net Open Position and calculation of capital charge on foreign exchange risk. Upon a review and to ensure greater alignment with international standards and consistent implementation across All India Financial Institutions, there is a felt need to amend these instructions.

2. Accordingly, in exercise of the powers conferred by Section 45L of the Reserve Bank of India Act, 1934 and all other provisions / laws enabling the Reserve Bank of India (RBI) to issue instructions in this regard, the RBI being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues the Amendment Directions hereinafter specified.

3. (i) These instructions shall be called the Reserve Bank of India (All India Financial Institutions (AIFIs) – Prudential Norms on Capital Adequacy) Fourth Amendment Directions, 2026.

(ii) These Amendment Directions shall come into effect from April 1, 2027.

4. Reserve Bank of India (All India Financial Institutions (AIFIs) – Prudential Norms on Capital Adequacy) Directions, 2025 are amended as provided below.

(i) Paragraph 192 shall be substituted by the following, namely: -

“D.4 Foreign Exchange Risk

192. An AIFI shall compute capital charge for foreign exchange risk as per the following method.

Scope of Application

(1) An AIFI shall compute Net Open Position and maintain capital charge for foreign exchange risk at both group / consolidated level and solo / standalone level. For this purpose, an AIFI may refer to paragraph 8 of these Directions.

(2) An AIFI shall meet the capital requirements for foreign exchange risk on a continuous basis, i.e., at the close of each business day.

Exclusions from Net Open Position

(3) An AIFI shall not apply foreign exchange risk capital requirement to any position that is deducted from the AIFI’s regulatory capital, including a position that is hedging such a position.

(4) Holdings of capital instruments that are deducted from an AIFI’s capital or risk weighted at 1250 per cent are not required to be included in the forex risk capital requirements. This includes:

(i) holdings of the AIFI’s own eligible regulatory capital instruments; and

(ii) holdings of other AIFIs’ and other financial entities’ eligible regulatory capital instruments, as well as intangible assets, where such assets are deducted from capital.

(5) An AIFI shall not apply forex risk capital requirements to securities which are (i) already matured and remain unpaid; or (ii) have been classified as non-performing asset / investment. Such securities shall attract capital only for credit risk.

Exclusion of certain structural foreign exchange positions from Net Open Position

(6) An AIFI shall have the option to exclude certain structural foreign currency investments from the calculation of Net Open Position, on both standalone and consolidated basis.

(7) The forex risk positions eligible for exclusion under sub-paragraph (6) above shall be structural (i.e., non-dealing) in nature, including capital investments and accumulated / unremitted surplus in overseas consolidated subsidiaries, Joint Ventures and associates, overseas branches, IFSC Banking Units, Offshore Banking Units in Special Economic Zones denominated in foreign currencies.

(8) An AIFI may opt to exclude structural foreign exchange positions from Net Open Position on a case-to-case basis, in a consistent manner, provided the exemption meets each of the criteria mentioned in sub-paragraph (9) below.

(9) An AIFI shall comply with each of the following conditions while excluding currency risk positions under sub-paragraph (6) above:

(i) The exclusion is limited to the amount that neutralises the sensitivity of the capital ratio to movements in exchange rates.

(ii) The exclusion from the calculation is made for at least six months.

(iii) The establishment of a structural foreign exchange position and any changes in its position shall follow the AIFI’s risk management policy for structural foreign exchange positions.

(iv) The exclusion from the calculation shall be applied consistently, with the exclusionary treatment of the hedge remaining in place for the life of the assets or other items.

(v) The AIFI shall document and have available for supervisory review the positions and amounts to be excluded from market risk capital requirements.

(10) A matched currency risk position will protect an AIFI against loss from movements in exchange rates, but will not necessarily protect its capital adequacy ratio. If an AIFI has its capital denominated in its domestic currency and has a portfolio of foreign currency assets and liabilities that is completely matched, its capital / asset ratio will fall if the domestic currency depreciates. By running a short risk position in the domestic currency, the AIFI can protect its capital adequacy ratio, although it would result in a loss in the event of appreciation of the domestic currency. An illustration of the exclusion of structural foreign currency investments from Net Open Position is provided in sub-paragraph (11) below.

(11) Illustration of exclusion of structural foreign currency investments from Net Open Position:

(i) The paragraphs below provide an example of the exclusion of structural foreign currency investments from Net Open Position. The example uses a simplified scenario and is for illustrative purposes only.

(ii) An AIFI may adopt an alternative methodology, with reasonable assumptions, to determine its maximum Net Open Position to be excluded. The methodology shall be documented in the AIFI’s risk management policy for structural foreign exchange positions.

(iii) Assume an AIFI with the below balance sheet consisting of domestic currency (DC) assets / liabilities and foreign currency (FC) assets / liabilities.

Case 1: The forex assets and liabilities are perfectly matched.

Assume that the foreign currency appreciates, with exchange rate increasing from 1 to 1.2. Although, the forex assets and liabilities increase by the same percentage (20 per cent) and hence continue to be perfectly matched, the AIFI’s capital ratio will decline since forex RWAs increase by 20 per cent, while capital amount remains unchanged.

Case 2: The AIFI takes a structural long position (i.e., structural forex positions listed in sub-paragraph (7) above) in the foreign currency (i.e., short position in the domestic currency).