Banks may have to set aside more capital against some of their trading and treasury exposures from April 2027, when the Reserve Bank of India’s revised market-risk framework kicks in.
The impact is expected to be sharper in portfolios where regulatory capital is a key determinant of profitability, particularly equities, long-duration and lower-rated credit, options and less-transparent fund exposures, industry experts said.
“The impact could be significant for portfolios where capital consumption directly influences business profitability and pricing,” said Hrishikesh Wattamwar, associate partner, Deloitte India.
Higher capital requirements could reduce risk-adjusted returns, constrain the amount of inventory banks are willing to hold and influence their hedging, market-making and client-pricing decisions, he said.
A treasury official at a private sector bank, however, expects the overall increase in capital consumption to be modest. The bigger change, according to the official, will be a more comprehensive assessment of market risks.
“Capital consumption will go up slightly and become safer from the regulatory point of view,” the official said, adding that banks would be able to assess risks more comprehensively and provide for them under the revised framework.
The RBI on Monday issued its final guidelines on minimum capital requirements for market risk under Basel III for commercial banks. The rules will take effect from April 1, 2027.
“The directions aim to align the market risk guidelines with the revised Basel III framework, as part of RBI’s adoption of the Basel standards, while ensuring simplicity of regulations, and providing flexibility and ease of adoption,” the central bank said.
Banks with sizeable trading books are likely to see the largest absolute impact, particularly those with significant equity holdings, opaque fund exposures and certain bank capital instruments, experts said. Banks with smaller, government-security-dominated and well-hedged portfolios could face a more moderate capital impact, though they would still have to bear the cost of implementing the new framework.
The rules revise the scope of the trading book, the calculation of net open positions and foreign-exchange risk capital charges, specific-risk capital requirements for interest-rate exposures, and the treatment of debt mutual funds and exchange-traded funds (ETFs) held in the trading book.
For interest-rate risk, the specific-risk tables have been revised to align them with Basel Committee on Banking Supervision guidelines. In the case of debt mutual funds and ETFs, capital requirements will be determined by the risks embedded in their underlying portfolios, subject to prescribed safeguards.
This could make transparency of fund portfolios increasingly important for banks.
“This means banks will need greater visibility into the underlying holdings of debt funds and ETFs to assess the relevant risks,” Wattamwar said.
Funds with mixed exposures or limited disclosure could attract higher capital requirements, making timely information on portfolio composition, credit ratings and maturities more important for both investment and capital-management decisions, he added.
The revised rules could also change the way banks manage their trading books. Inventory limits and bid-offer spreads could be affected as desks factor capital consumption into the economics of market-making. While government securities will continue to receive favourable capital treatment, banks could become more selective in corporate bonds depending on issuer quality, tenor and the effectiveness of available hedges, Wattamwar explained.
The framework also revises the treatment of positions hedged through credit derivatives to include total-return swaps permitted under the RBI’s 2026 directions on credit derivatives.
Another area of focus will be internal risk transfers. The treasury official said banks would have to distinguish more clearly between internal and external transfers of risk, with internal risk transfers used for hedging needing to be backed by external counterparties.
The RBI has also removed separate instructions defining the trading book, since its investment directions already provide for a clearly identifiable trading book under the held-for-trading classification.
The revised framework brings India’s market-risk regulations closer to global Basel standards and gives banks a more standardised and transparent basis for measuring and capitalising trading-book risks, said Ashish Bhalerao, partner, financial services risk consulting, EY India.
“Banks that begin their impact assessments now, particularly around the boundary between banking and trading books, and how internal risk transfers are documented, will be far better positioned when the framework takes effect in April 2027,” Bhalerao said.
The option to exclude certain structural foreign-currency positions from the net open position could also provide some relief to banks with significant overseas operations, he added.The RBI said transition scalars have been in place since April 1, 2024, to facilitate a smooth shift to the revised framework.