Banks To Get Relief As RBI Simplifies Forex Risk And NOP Calculations, Effective April 2027

New Delhi, Jun 25 (KNN) The Reserve Bank of India (RBI) on Wednesday issued final amendment directions revising the framework for computing net open position (NOP) and capital charges for foreign exchange risk across banks and financial institutions. 

The directions, which come into effect on April 1, 2027, bring India's framework in closer alignment with Basel Committee on Banking Supervision standards.

Under the revised rules, banks will no longer be required to separately calculate onshore and offshore foreign exchange positions. All open positions from both onshore and offshore operations will instead be captured under a single, unified NOP calculation.

Structural Positions Can Be Excluded

Banks may now exclude certain structural foreign currency positions from NOP calculations at both standalone and consolidated levels. 

Eligible exclusions include capital investments and accumulated or unremitted surplus in overseas subsidiaries, joint ventures, associates, overseas branches, International Financial Services Centre (IFSC) Banking Units and Offshore Banking Units denominated in foreign currencies. 

The RBI has also removed the earlier draft requirement for prior regulatory approval for such exemptions, allowing banks to apply them on a case-by-case basis.

Treatment of Derivatives and Gold

Responding to industry feedback, the RBI clarified that banks shall use current spot rates without present-value adjustment when measuring derivative exposures. 

The requirement to follow Foreign Exchange Dealers' Association of India (FEDAI) guidelines for spot rates under the shorthand method has been replaced, with banks now permitted to use financial benchmarks administered by authorised benchmark administrators.

The revised shorthand method for NOP calculation also treats gold positions separately from foreign currency positions, in line with Basel standards. Banks will calculate the net gold position independently and add it to the larger of the aggregate net long or net short foreign currency positions to determine overall NOP and the associated capital charge.

Capital Charge Requirements Retained

The RBI has retained the requirement for banks and all-India financial institutions to maintain a capital charge for foreign exchange risk at both standalone and consolidated levels. 

While some regulated entities had sought relaxation from consolidated-level capital requirements citing operational challenges, the central bank has permitted the use of internal limits in individual currencies as a proxy for actual positions in certain marginal overseas operations for consolidated NOP calculations.

The final directions apply to commercial banks, small finance banks, local area banks, regional rural banks, urban and rural cooperative banks, all-India financial institutions and standalone primary dealers.

(KNN Bureau)