Context:
The Reserve Bank of India (RBI) has proposed revisions to the framework governing how banks calculate net foreign exchange (FX) exposure and set aside capital for FX risk, with the aim of aligning domestic norms with global standards and ensuring uniform implementation across regulated entities.
The proposed rules are open for stakeholder feedback and are expected to come into effect from April 1, 2027.
What is changing?
1. Unified net open position (NOP) calculation
- RBI has proposed doing away with separate onshore and offshore NOP calculations
- Banks would compute a single consolidated FX exposure
- This simplifies reporting and improves comparability across institutions
2. Exclusion of ‘structural’ FX positions
Banks may exclude certain long-term, non-trading FX positions from NOP calculations, such as:
- Foreign-currency investments in:
- Overseas subsidiaries
- Branches
- Affiliated but non-consolidated entities
These positions are typically strategic and long-term, not meant for short-term trading gains.
Why RBI is proposing these changes
- To align India’s FX risk framework with global regulatory practices
- To remove inconsistencies in how banks calculate FX exposure
- To ensure more accurate capital allocation against FX risk
- To reduce unnecessary capital strain arising from structural, non-volatile exposures
