On 21st September 2026, the Reserve Bank of India issued (Commercials Banks – Minimum Capital Requirements for Market Risk) Directions, 2026[1]. The Directions aim to align the market risk guidelines with the revised Basel III framework. The Directions will take effect from 1st April 2027, ensuring sufficient time for banks to accommodate as per the directions so issued. It is significant to note that to ensure smooth implementation, intermediate (transition) scalars have been in effect since April 1, 2024.
For the purpose of applicability, these Directions shall apply to all Commercial Banks, including but not limited to banking companies, small finance banks, payment banks, local area banks, and SBI.
These Directions prescribe the minimum regulatory capital that commercial banks must maintain against market risk exposures as market risk generally arises from adverse movements in the following:
- Interest rates
- Foreign Exchange rates
- Equity prices
- Commodity prices
- Trading book positions
The framework is intended to ensure that banks hold sufficient capital to absorb potential losses from market price fluctuations and to strengthen the resilience of the banking system.
Further, Chapter II of the framework specifies the distinction between banking book and trading book. Trading book includes all instruments that are classified as “Held for Trading” as per Reserve Bank of India (Commercial Banks – Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025. For example, instruments in the correlation trading portfolio; instruments that would give rise to a net short credit or equity position in the banking book; or instruments resulting from underwriting commitments, where underwriting commitments refer only to securities underwriting, and relate only to securities that are expected to be actually purchased by the bank on the settlement date.
Chapter III of the framework clarifies that market risk capital requirements primarily apply to interest rate and equity risks in the trading book, while foreign exchange risk extends to both the trading book and banking book. Importantly, banks must ensure compliance with prescribed market risk capital requirements on a continuous, day-to-day basis, rather than merely at periodic reporting dates.
The Directions also prevent double counting of capital by excluding exposures that are already deducted from regulatory capital or otherwise subjected to credit risk treatment. Further, RBI permits the exclusion of certain structural foreign currency investments from Net Open Position calculations, provided the bank satisfies stringent requirements relating to governance, documentation, consistency of application, and supervisory oversight. These provisions recognize the unique nature of long-term overseas investments and seek to align regulatory capital more closely with the underlying economic risk.
Under Chapter IV of the framework, banks shall use simplified standardized approach for computing risk weighted assets for market risk. A particular formula has also been provided in the framework for the same.
Chapter V deals with market risk disclosure and repealed provisions
Banks are required to make both qualitative and quantitative disclosures relating to their market risk exposures as part of the Basel III Pillar 3 disclosure framework.
The disclosures must cover:
- General qualitative disclosures relating to market risk, including the bank’s market risk management framework, governance arrangements, risk measurement methodologies, and policies.
- Quantitative disclosures on market risk capital requirements calculated under the Simplified Standardized Approach (SSA).
The objective is to enhance transparency and enable stakeholders to assess a bank’s exposure to market risk and the adequacy of its capital against such risks.
With the coming into force of these Directions:
- Section D (except Sub-section D.8) of Chapter IV titled “Capital charge for market risk” under the Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025 stands repealed.
- The repeal is prospective in operation; however, the provisions that are repealed are deemed to have been validly in force prior to the commencement of the 2026 Directions.
- Any directions, guidelines, or instructions that had already been repealed before issuance of these Directions continue to remain repealed.Reserve Bank of India
https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=13705
FAQs
To which banks do the RBI (Commercial Banks – Minimum Capital Requirements for Market Risk) Directions, 2026 apply?
The Directions apply to all commercial banks regulated by the Reserve Bank of India, including banking companies, Small Finance Banks, Payments Banks, Local Area Banks and State Bank of India (SBI).
When will the Directions come into effect?
The Directions will come into force from 1 April 2027. The transition period is intended to provide banks with sufficient time to align their systems, risk-management frameworks and capital computation processes with the revised Basel III market-risk framework. Intermediate transition scalars have already been applicable from 1 April 2024.
What types of market risks are covered under the new framework?
The framework addresses market risks arising primarily from adverse movements in interest rates, foreign exchange rates, equity prices and commodity prices, as well as risks associated with positions held in the trading book. Interest rate and equity risks primarily apply to the trading book, while foreign exchange risk covers both the trading book and banking book.
How are banks required to calculate their capital requirements for market risk?
Banks are required to use the Simplified Standardized Approach (SSA) for calculating risk-weighted assets for market risk. The Directions prescribe the methodology and formulae for determining the applicable market-risk capital requirements. Banks are also required to maintain compliance with these requirements on a continuous, day-to-day basis, rather than only on reporting dates.
What are the key disclosure and transitional implications of the Directions?
Banks must make qualitative and quantitative market-risk disclosures under the Basel III Pillar 3 framework, including disclosures on their market-risk management framework, governance, risk-measurement methodologies and capital requirements under the SSA. Further, with effect from 1 April 2027, Section D (except Sub-section D.8) of Chapter IV of the RBI (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025, relating to capital charge for market risk, will stand repealed prospectively. The repeal does not revive provisions that had already been repealed before the 2026 Directions.
