RBI drops separate onshore-offshore foreign-exchange position calculation

The revised framework aligns foreign exchange risk calculations with Basel standards and allows certain structural foreign-currency exposures to be excluded from NOP calculations

Banks will no longer be required to separately calculate onshore and offshore foreign-exchange positions, while certain structural foreign-currency exposures can be excluded from net open position (NOP) calculations, subject to prescribed conditions, according to the Reserve Bank of India's (RBI's) final amendment directions on NOP issued on Wednesday.

 

The central bank issued the final directions after examining feedback received on draft norms released in January. The revised framework, which will come into effect on April 1, 2027, aligns the calculation of foreign-exchange risk with Basel standards and clarifies the treatment of overseas operations, structural foreign-currency investments and derivative exposures.

 

Under the revised framework, banks can exclude specified structural foreign-exchange positions from NOP calculations at both standalone and consolidated levels. These 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 regulator also allowed lenders to apply such exemptions on a case-by-case basis, removing the draft requirement for prior regulatory approval.

 

The final directions also clarify that all open positions from onshore and offshore operations will be captured under a single NOP calculation, eliminating the need for separate computation of offshore positions.

 

Among other changes, the RBI accepted industry feedback on the treatment of derivative positions and said banks shall use current spot rates, without present-value adjustment, for measuring derivative exposures. It also replaced the requirement to use Foreign Exchange Dealers' Association of India (FEDAI) guidelines for spot rates under the shorthand method, allowing banks to use financial benchmarks administered by authorised benchmark administrators.

 

The RBI also 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 permitted the use of internal limits in individual currencies as a proxy for actual positions in certain marginal overseas operations for the purpose of consolidated NOP calculations.

 

The revised framework also modifies the shorthand method for calculating NOP in line with Basel standards by treating gold positions separately from foreign-currency positions. Under the framework, banks will calculate the net position in gold independently and add it to the larger of aggregate net long or net short foreign-currency positions for determining overall NOP and the associated capital charge.