The Reserve Bank of India (RBI) has finalised new rules on how commercial banks must set aside capital to protect themselves against market-related losses, bringing India’s banking regulations closer to the revised Basel III framework.
The new rules will take effect from April 1, 2027, giving banks time to update their systems and prepare for the changes. The framework covers risks linked to interest rates, equity prices and foreign exchange movements.
One of the biggest changes is a clearer approach to the way banks classify financial instruments. The RBI has said instruments classified as “Held for Trading” will form part of the trading book for calculating capital requirements.
Banks will not be allowed to shift instruments between their trading and banking books simply to reduce the amount of capital they need to hold. If an instrument is moved, the bank will have to calculate its capital requirement before and after the change and maintain the difference where applicable.
The move is intended to prevent regulatory arbitrage and ensure that banks cannot use accounting classifications to lower their capital requirements without reducing the underlying market risk.
The RBI has prescribed the Simplified Standardised Approach for calculating risk-weighted assets for market risk. The framework broadly covers three areas: interest-rate risk, equity risk and foreign-exchange risk. Banks will also have to maintain the required market-risk capital on an ongoing basis, including at the close of each business day.
The rules also update the way banks calculate interest-rate risk. The RBI has revised the specific-risk tables to bring them in line with guidelines issued by the Basel Committee on Banking Supervision.
Foreign-exchange risk rules have also been updated. The new framework incorporates revised provisions for banks’ net open positions and forex risk capital charges. Certain eligible structural foreign-currency positions can also be excluded from the net open position calculation, subject to conditions set by the RBI.
Another change affects debt mutual funds and exchange-traded funds held in banks’ trading books. Their capital requirements will now be calculated with greater focus on the underlying risks of the instruments, while retaining safeguards prescribed by the regulator.
The RBI has also updated rules for positions protected through credit derivatives. The revised framework includes positions hedged through total return swaps where such transactions are allowed under the central bank’s credit-derivatives rules.
The final directions follow the RBI’s earlier draft framework and feedback received from stakeholders. The regulator said the revised rules are designed to align Indian regulations with Basel III while keeping implementation relatively simple and flexible for banks.
The RBI has already introduced transition measures. Intermediate transition scalars have been in place since April 1, 2024, to help banks gradually move towards the revised capital framework. The full set of directions will become applicable from April 1, 2027.
The new rules apply to commercial banks, while small finance banks, payments banks and local area banks are outside their scope.
Market risk becomes important when movements in interest rates, currency values, share prices or other financial markets affect the value of a bank’s investments and trading positions. Adequate capital acts as a buffer against such losses and helps protect a bank’s balance sheet.
The RBI’s revised framework therefore seeks to make the link between market risks and capital requirements clearer. Banks will need to review their trading portfolios, risk calculations, reporting systems and capital planning before the new rules take effect.
The changes also come as Indian banks increasingly operate across a wider range of financial markets. Stronger and more consistent capital requirements are intended to ensure that banks have enough financial protection when markets turn volatile.
With the April 2027 deadline now set, banks have several months to adjust to the revised Basel III market-risk framework and put the required systems in place.