Background
The Reserve Bank of India, vide circular RBI/2026-27/161 (DOR.MRG.REC.No.147/21-01-002/2026-27) dated June 24, 2026, issued the Reserve Bank of India (All India Financial Institutions (AIFIs) – Prudential Norms on Capital Adequacy) Fourth Amendment Directions, 2026. These directions amend Paragraph 192 (Section D.4) of the RBI (AIFIs – Prudential Norms on Capital Adequacy) Directions, 2025 dated November 28, 2025, which governs the methodology for computation of Net Open Position (NOP) and calculation of capital charge on foreign exchange risk.
The amendment is aimed at ensuring greater alignment with international standards and consistent implementation across All India Financial Institutions. The revised directions shall come into effect from April 1, 2027.
For reference, All India Financial Institutions covered under these directions include institutions such as EXIM Bank, NABARD, NaBFID, and NHB.
Scope of Application
Every AIFI is required to compute Net Open Position and maintain capital charge for foreign exchange risk at both the group or consolidated level and the solo or standalone level. The capital requirements for foreign exchange risk are to be met on a continuous basis, that is, at the close of each business day.
Exclusions from Net Open Position
The directions specify three categories of positions that are excluded from the NOP for the purpose of forex risk capital computation.
First, any position that is deducted from the AIFI's regulatory capital, including a hedging position against such a deducted position, shall not attract forex risk capital requirements.
Second, holdings of capital instruments that are either deducted from capital or risk-weighted at 1250 per cent are excluded. This covers the AIFI's own eligible regulatory capital instruments as well as those of other AIFIs and financial entities, including intangible assets where deducted from capital.
Third, securities that have either already matured and remain unpaid, or have been classified as non-performing assets or investments, are excluded from forex risk capital requirements. Such securities shall attract capital only for credit risk.
Structural Foreign Exchange Position Exemption
One of the significant additions in the amended framework is the provision for excluding certain structural foreign currency positions from the computation of Net Open Position, on both standalone and consolidated bases.
Structural positions eligible for exclusion include capital investments and accumulated or unremitted surplus in overseas consolidated subsidiaries, joint ventures and associates, overseas branches, IFSC Banking Units, and Offshore Banking Units in Special Economic Zones, where these are denominated in foreign currencies.
An AIFI may exercise this exemption on a case-to-case basis, provided the following conditions are satisfied:
The exclusion is limited to the amount that neutralises the sensitivity of the capital ratio to movements in exchange rates. The exemption must be maintained for a minimum period of six months. The establishment and any changes to a structural foreign exchange position must follow the AIFI's documented risk management policy for structural foreign exchange positions. The exclusionary treatment of the hedge must remain in place consistently for the life of the relevant assets or items. The AIFI must document and make available for supervisory review the positions and amounts excluded from market risk capital requirements.
The directions also clarify that while a matched currency risk position protects an AIFI against exchange rate losses, it does not necessarily protect the capital adequacy ratio. Where the AIFI's capital is denominated in domestic currency and its foreign currency portfolio is perfectly matched, a depreciation of the domestic currency will reduce the capital-to-asset ratio, since risk-weighted assets increase while capital remains unchanged. Holding a structural long position in foreign currency — effectively a short position in domestic currency — can protect the capital adequacy ratio, though it entails a risk of loss if the domestic currency appreciates.
Calculation of Maximum Structural Exemption
The directions prescribe a methodology for determining the maximum structural foreign exchange position that may be excluded from Net Open Position. The computation involves calculating the additional capital required to maintain the capital ratio unchanged for a one per cent change in the exchange rate. The exemption amount is derived by dividing this incremental capital requirement by one per cent.
An alternative and equivalent method is to multiply the CET1 capital ratio by the forex risk-weighted assets denominated in the relevant foreign currency.
The following operational parameters apply to this calculation:
The CET1 ratio on a quarter-end basis is to be used. Forex RWAs for this purpose include all RWAs denominated in the relevant foreign currency, excluding those already used for forex market risk capital computation under Paragraph 192. As an alternative, an AIFI may include only the credit RWAs in that currency. The structural exemption in any currency is capped at the eligible structural position in that currency. Structural exemptions are to be recalculated on a quarterly basis. The calculation must be performed separately for each foreign currency in which the AIFI seeks an exclusion.
Computation of Net Open Position
For the purpose of measuring capital requirements for foreign exchange risk, all positions in foreign currencies — including gold — are to be included, whether held in the trading book or the banking book.
The Net Open Position in each currency is calculated by aggregating the following components: the net spot position, being all assets less all liabilities including accrued interest in that currency; the net forward position, covering unsettled tom and spot transactions, forward and futures transactions, and principal on cross-currency swaps and other forex derivatives; guarantees and similar instruments certain to be called and likely to be irrecoverable; net future income or expenses that are certain in amount and have been fully hedged, at the AIFI's discretion; any other items representing profit or loss in foreign currencies; and the net delta-based equivalent of the total book of foreign currency options.
Options are additionally subject to a separately computed capital requirement for gamma and vega risks.
All open positions from onshore and offshore operations are captured in a single NOP calculation. An AIFI is not required to compute separate onshore and offshore NOPs. Overseas operations include overseas branches, IFSC Banking Units, Offshore Banking Units in Special Economic Zones, and overseas subsidiaries, associates, and joint ventures. Capital invested in and accumulated or unremitted surplus of overseas operations are to be included in the NOP based on quarter-end positions.
Derivative positions are to be measured using current spot rates without present value adjustment. For gold, net positions (spot plus forward) are to be expressed in standard units of measurement and valued at current spot rates.
Interest accrued but not yet received, and accrued expenses, are to be treated as spot positions. Unearned future interest and anticipated expenses may be excluded unless the amounts are certain and hedged by the AIFI. Where an AIFI chooses to include future income or expenses, it must do so consistently and may not selectively include only those flows that reduce its position.
Spot rates used for NOP computation under the shorthand method must be sourced from financial benchmarks administered by benchmark administrators authorised under the relevant FMRD directions.
Capital Charge on Net Open Position
The capital requirement for foreign exchange risk, including gold, is fixed at 9 per cent of the overall Net Open Position computed using the shorthand method. This requirement is in addition to the capital charges applicable for credit risk and interest rate risk on on-balance sheet and off-balance sheet items relating to foreign exchange and gold transactions.
Under the shorthand method, the overall NOP is computed as the higher of the sum of net long positions or the sum of net short positions across all currencies, to which the absolute net position in gold is added.
Interaction with Master Direction on Risk Management and Inter-Bank Dealings
AIFIs that are also subject to the Master Direction on Risk Management and Inter-Bank Dealings shall continue to be guided by that Direction for matters relating to NOP reporting, applicable limits, and limits specifically applicable to Net Open Positions involving the Indian Rupee as one of the currencies.
Source: RBI/2026-27/161 | DOR.MRG.REC.No.147/21-01-002/2026-27 | June 24, 2026
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