RBI Tightens Trading Book Rules and Eases Structural FX Positions
On 21 September 2026 the Reserve Bank of India issued final directions on the capital that commercial banks must hold against market risk. The package does two things at once. It makes it harder for a bank to move a security from the trading book to the banking book just to save capital. It also lets lenders leave certain long term foreign currency holdings out of their net open position. The rules take effect from 1 April 2027. Transition scalars have already been in force since 1 April 2024.
The trading book, for capital purposes, is now the same set of instruments that banks already mark as Held for Trading under the investment directions of 2025. Everything else sits in the banking book and draws a credit risk charge rather than a market risk charge. That includes holdings classified as held to maturity, available for sale, fair value through profit or loss that are not held for trading, and stakes in own subsidiaries, joint ventures and associates. The central bank removed a separate definition of the trading book from the new text because the accounting label already draws the line.
The warning that matters for treasuries is blunt. A bank shall not reclassify instruments between the trading book and the banking book for regulatory arbitrage, that is, with the intention of achieving lower capital requirements. If a bank still moves an instrument, it must compute the total capital requirement before and after the shift and hold capital equal to the difference. That closes a familiar gap in which a bond that looked cheap on the trading book could be parked in the banking book when prices turned.
Market risk capital will be calculated under a simplified standardised approach covering interest rate risk, equity risk and foreign exchange risk. Banks must keep the required capital every day, including at the close of business. Specific risk tables for interest rate risk have been rewritten to match Basel Committee guidance. Positions hedged with credit derivatives, including total return swaps allowed under the 2026 credit derivatives directions, get a clearer treatment. The RBI said the aim is alignment with the revised Basel three market risk framework, with simpler wording and enough time for banks to adopt it.
Foreign exchange is the other half of the story. Banks may exclude specified structural currency positions from net open position on both a standalone and a consolidated basis. Those positions are not dealing books. They include capital invested in overseas subsidiaries, joint ventures and associates, accumulated or unremitted surplus in those entities, and similar holdings in overseas branches, IFSC banking units and offshore banking units in special economic zones. The exclusion is capped at the amount that offsets the effect of exchange rate moves on the capital ratio. A bank that uses the option must keep it for at least six months, apply it consistently, follow its own risk policy, and recompute the eligible amount each quarter. Approval in each case is no longer required in the way the earlier draft had suggested.
Debt funds held in the trading book also change. If a mutual fund or exchange traded fund has at least 90 percent of assets in debt instruments and meets disclosure and valuation tests, capital will follow the underlying bonds. Funds that fail those tests, including those with less than 90 percent in debt, will be treated like equity for market risk capital. Some other holdings, including contributions to the Corporate Debt Market Development Fund, will carry a 9 percent capital charge.
For Indian banks with overseas units and large rupee books the September directions are a planning document as much as a rulebook. They have until April 2027 to separate what they trade from what they hold, to document why a foreign currency stake is structural rather than a bet, and to recode debt funds that no longer look like bonds. The RBI has given time. It has also made clear that time is not a licence to dress a trading position as a long term asset.
