The Reserve Bank of India (“RBI”) has issued the Reserve Bank of India (Commercial Banks – Minimum Capital Requirements for Market Risk) Directions, 2026, marking a significant step towards aligning India’s market risk capital framework for commercial banks with the revised Basel III standards.

The Directions will come into effect from April 1, 2027, giving banks a transition period to prepare for the revised requirements. RBI has also noted that intermediate transition scalars have already been in effect since April 1, 2024.

Alignment with the Revised Basel III Framework

The new Directions follow RBI’s draft guidelines issued on February 17, 2023, which had proposed the adoption of the Simplified Standardised Approach for calculating capital requirements for market risk.

Following stakeholder feedback, RBI has incorporated modifications into the final framework while seeking to maintain simplicity, flexibility and ease of adoption.

The principal changes include:

Trading book

The final Directions no longer separately prescribe the definition of the trading book. Since the RBI’s Investment Directions already identify the trading book through the Held for Trading accounting sub-classification, the final framework instead refers to those Investment Directions.

Net open position and foreign exchange risk

The revised requirements relating to net open positions and the foreign exchange risk capital charge have been incorporated from the Prudential Norms on Capital Adequacy Tenth Amendment Directions, 2026.

Interest rate risk

The specific risk tables applicable to interest rate risk have been revised to align with the guidelines issued by the Basel Committee on Banking Supervision. RBI states that the revised treatment is intended to provide a more concise framework for addressing specific risk.

Debt mutual funds and ETFs

The capital treatment for debt mutual funds and exchange traded funds held in the trading book has been revised. The revised approach is intended to ensure that capital computation reflects the underlying risk drivers, while retaining appropriate regulatory guardrails.

Positions hedged through credit derivatives

The Directions also revise the treatment of positions hedged through credit derivatives. In particular, the framework incorporates treatment for positions hedged using total return swaps, where such swaps are permitted under the RBI’s Credit Derivatives Directions, 2026.

What the New Framework Means for Banks

The revised framework is likely to require banks to assess their existing market risk measurement, capital computation and internal processes ahead of the April 1, 2027 implementation date.

In practical terms, banks may need to focus on:

Reviewing the classification of trading book positions in accordance with the applicable Investment Directions.
Assessing the impact of revised interest rate and foreign exchange risk capital requirements.
Reviewing the capital treatment of debt mutual funds and ETFs held in the trading book.
Assessing existing hedging arrangements involving credit derivatives and total return swaps.
Aligning internal systems, data architecture and capital computation processes with the revised methodology.

The RBI’s approach therefore represents not merely a revision of individual capital charges, but a broader alignment of the market risk framework with the revised Basel III standards while retaining a relatively simplified regulatory approach.

With the Directions taking effect from April 1, 2027, banks have a defined implementation window to assess the impact of the revised framework and make the necessary operational and regulatory adjustments.

RBI's Minimum Capital Requirements for Market Risk under Basel III