RBI Drops Separate Onshore-Offshore Foreign Exchange Position Calculation

Source: Business Standard

Context

The Reserve Bank of India (RBI) on Wednesday, 24 June 2026 issued the final amendment directions on Net Open Position (NOP) for banks and All-India Financial Institutions (AIFIs), after examining feedback on the draft norms released in January 2026 (comments deadline: 3 February 2026). The revised framework, which comes into effect on 1 April 2027, aligns the calculation of foreign-exchange risk with Basel Committee on Banking Supervision (BCBS) standards and clarifies the treatment of overseas operations, structural foreign-currency investments, and derivative exposures. The most significant change: banks will no longer be required to separately calculate onshore and offshore foreign-exchange positions — all open positions from onshore and offshore operations will be captured under a single, unified NOP calculation. Banks can also exclude specified structural foreign-exchange positions from NOP calculations at both standalone and consolidated levels, including capital investments and accumulated or unremitted surplus in overseas subsidiaries, joint ventures, associates, overseas branches, IFSC Banking Units (IBUs), and Offshore Banking Units (OBUs) denominated in foreign currencies. Crucially, the draft requirement of prior regulatory approval for such exclusions has been dropped — banks can apply such exemptions on a case-by-case basis. The RBI accepted industry feedback on derivative positions, allowing banks to use current spot rates without present-value adjustment for measuring derivative exposures, and replaced the requirement to use Foreign Exchange Dealers Association of India (FEDAI) guidelines for spot rates with financial benchmarks administered by authorised benchmark administrators.

Key Changes

Change	Earlier Framework	Revised Framework (1 April 2027)
NOP Calculation	Separate onshore + offshore positions	Single unified NOP covering all operations
Structural FX Positions	Generally included in NOP	Can be excluded (case-by-case, no prior RBI approval)
Capital in Overseas Subsidiaries	Included in NOP	Can be excluded (in foreign currency)
Derivative Spot Rate	FEDAI guidelines	Financial benchmarks administered by authorised benchmark administrators
Derivative Measurement	With present-value adjustment	Without present-value adjustment (current spot rates)
Shorthand Method (Gold)	Combined with FX	Gold treated separately
Consolidated Capital Charge	Required	Retained; internal limits allowed as proxy for marginal overseas operations
Application of Exemptions	Required prior RBI approval (draft)	Case-by-case (no prior approval required)

Structural Foreign-Exchange Positions Excluded from NOP

The following can be excluded at both standalone and consolidated levels:

1. Capital investments in overseas subsidiaries (foreign currency).
2. Capital investments in joint ventures (JVs) and associates (foreign currency).
3. Capital investments in overseas branches (foreign currency).
4. Capital investments in IFSC Banking Units (IBUs) (foreign currency).
5. Capital investments in Offshore Banking Units (OBUs) (foreign currency).
6. Accumulated or unremitted surplus in any of the above.

Net Open Position (NOP)

• What: The difference between a bank’s total foreign currency assets and liabilities; reveals exposure to currency fluctuations or exchange rate risk; NOP is a single, easy-to-read domestic-currency exposure number that compresses the bank’s complete FX book; regulated by RBI under the FEMA, 1999 and RBI’s prudential framework; must be backed by capital charge for foreign-exchange risk.
• Where: Applies to all banks and AIFIs in India, including their overseas operations; monitored by RBI from Mumbai.

Shorthand Method

• What: A simplified methodology to calculate NOP under Basel standards for smaller or less complex banks; aggregates long and short positions across currencies into net long and net short positions; larger of the two is the NOP; gold treated as a separate position (under revised framework).
• Where: Applied globally under BCBS framework; in India, RBI prescribes the methodology.

Basel Committee on Banking Supervision (BCBS)

• What: The primary global standard setter for prudential regulation of banks; comprises 45 members from 28 jurisdictions; sets standards for capital adequacy (Basel I, II, III, IV), liquidity, market risk, operational risk, foreign-exchange risk.
• Where: HQ at Bank for International Settlements (BIS) in Basel, Switzerland; standards followed globally including by India through RBI.

Foreign Exchange Dealers Association of India (FEDAI)

• What: An association of authorised dealer banks in India that frames rules for foreign exchange business and publishes daily reference rates for forex transactions; established in 1958; regulated by RBI.
• Where: HQ in Mumbai; serves all RBI-authorised dealer (AD) banks in India.

International Financial Services Centre (IFSC)

• What: A special economic zone for financial services, established under the Special Economic Zones Act, 2005; allows deemed offshore jurisdiction within India; GIFT City IFSC in Gandhinagar, Gujarat is India’s first and only IFSC; IBUs (IFSC Banking Units) of Indian and foreign banks operate there.
• Where: GIFT City, Gandhinagar, Gujarat; regulated by the International Financial Services Centres Authority (IFSCA), established under the IFSCA Act, 2019, headquartered in GIFT City.

Offshore Banking Unit (OBU)

• What: A bank branch located in a special economic zone (SEZ) or IFSC that is permitted to undertake international banking business (USD or other foreign currency); deemed offshore for regulatory purposes.
• Where: Operates in SEZs and IFSCs; in India, primarily at GIFT City and other SEZs.

Capital Charge for Foreign-Exchange Risk

• What: A regulatory capital requirement that banks must maintain to cover potential losses from foreign-exchange rate movements; calculated as a percentage of NOP; under Basel III, typically 8% of net open position.
• Where: Mandated by RBI for all Indian banks and AIFIs at both standalone and consolidated levels.

Practice MCQs

Q1. With reference to the RBI’s final amendment directions on Net Open Position (NOP) issued on 24 June 2026, consider the following statements:

1. The revised framework will come into effect on 1 April 2027.
2. Banks will no longer be required to separately calculate onshore and offshore foreign-exchange positions.
3. The framework aligns NOP calculation with Basel Committee on Banking Supervision (BCBS) standards.
4. The directions abolish the capital charge for foreign-exchange risk at the consolidated level.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the capital charge for foreign-exchange risk is RETAINED at both standalone and consolidated levels, NOT abolished.)

Q2. With reference to the structural foreign-exchange positions that can be excluded from NOP, consider the following statements:

1. Capital investments in overseas subsidiaries, joint ventures, and associates can be excluded.
2. Capital investments in overseas branches, IFSC Banking Units (IBUs), and Offshore Banking Units (OBUs) can be excluded.
3. Banks can apply such exemptions on a case-by-case basis without prior regulatory approval.
4. Such exclusions are permitted only at the standalone level, not at the consolidated level.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the exclusions are permitted at BOTH standalone and consolidated levels, NOT only at the standalone level.)

Q3. With reference to the treatment of derivative positions under the revised framework, consider the following statements:

1. Banks shall use current spot rates, without present-value adjustment, for measuring derivative exposures.
2. The requirement to use Foreign Exchange Dealers Association of India (FEDAI) guidelines for spot rates has been replaced with financial benchmarks administered by authorised benchmark administrators.
3. The revised framework eliminates derivative positions entirely from NOP calculations.
4. Internal limits in individual currencies may be used as a proxy for actual positions in certain marginal overseas operations for consolidated NOP calculations.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 3 is wrong; the framework does NOT eliminate derivative positions from NOP; it modifies their measurement methodology.)

Q4. With reference to the modified shorthand method for NOP calculation, consider the following statements:

1. Banks will calculate the net position in gold independently from foreign-currency positions.
2. The net gold position will be added to the larger of aggregate net long or net short foreign-currency positions.
3. The modification aligns with Basel Committee on Banking Supervision (BCBS) standards.
4. Under the new method, gold positions are merged with other foreign-currency positions without separation.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; under the new method, gold positions are treated SEPARATELY from foreign-currency positions, NOT merged.)

Q5. With reference to the Basel Committee on Banking Supervision (BCBS) and India’s regulatory alignment, consider the following statements:

1. The BCBS is the primary global standard setter for prudential regulation of banks.
2. The BCBS is headquartered at the Bank for International Settlements (BIS) in Basel, Switzerland.
3. India follows BCBS standards through RBI’s regulatory and prudential framework.
4. The BCBS comprises members from only G7 countries.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the BCBS comprises 45 members from 28 jurisdictions, including India and other emerging economies, NOT only G7 countries.)

Q6. With reference to the GIFT City IFSC and IFSC Banking Units (IBUs), consider the following statements:

1. GIFT City is India’s first International Financial Services Centre (IFSC), located in Gandhinagar, Gujarat.
2. IFSC Banking Units (IBUs) are branches of banks that operate in an IFSC and conduct international banking business.
3. The IFSC is regulated by the International Financial Services Centres Authority (IFSCA), established under the IFSCA Act, 2019.
4. IBUs are considered onshore for the purpose of foreign-exchange regulation in India.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; IBUs are considered offshore (deemed offshore jurisdiction) for regulatory purposes, NOT onshore.)

Answer Key

1. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because capital charge is retained.
2. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because exclusions apply at both levels.
3. (c), Statements 1, 2, 4 are correct; Statement 3 is wrong because derivatives are not eliminated.
4. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because gold is treated separately.
5. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because BCBS has 28 jurisdictions.
6. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because IBUs are deemed offshore.