RBI may mandate banks to set aside additional capital

Mumbai: RBI has proposed tighter capital norms to curb banks' exposure to volatility in foreign exchange and bullion markets by mandating a higher capital charge on open positions, according to draft regulations released for public comment.

Under the draft rules, commercial banks will be required to maintain a 9% capital charge on their net open positions in foreign exchange and gold from April 1, 2027. RBI said the proposal seeks to align domestic banking regulations with global standards while discouraging excessive risk-taking in currency and gold markets.

The draft introduces a flat "safety buffer", under which banks must hold capital equal to 9% of their overall net open position. This requirement will be in addition to existing capital charges for credit and interest rate risks associated with these assets. The RBI said the move consolidates the methodology for measuring such risks within the capital adequacy framework, replacing rules which were earlier spread across multiple directions.

The new norms, while strengthening bank stability, could translate into slightly higher loan, hedging and remittance costs for businesses. To standardise risk measurement, RBI has prescribed a simplified "shorthand method". Banks will be required to calculate net long and net short positions for each currency, with the total open position defined as the higher of the absolute net long or net short positions across all currencies, plus the net position in gold.

By way of illustration, if a bank has a net long position of Rs 300 crore in currencies and a net gold position of Rs 35 crore, its total exposure would be Rs 335 crore, requiring capital of around Rs 30.2 crore at the 9% charge.

According to the draft, gold exposures will be treated in the same manner as foreign currency positions. A bank's net position in gold, whether spot or forward, will be added to its foreign exchange exposure when calculating total risk. RBI said banks must therefore hold capital against gold holdings with the same rigour applied to volatile foreign currencies such as the dollar and the euro.

The draft also provides operational flexibility by allowing banks to determine their own "end of business day" for computing open positions, based on board-approved internal policies. Transactions undertaken after the cut-off can be rolled over and reflected in the next day's positions, a move RBI said would help banks manage time-zone differences and late-hour trades more efficiently.