The RBI has updated its foreign exchange risk reserve requirements under the Risk Management and Inter-Bank Dealings framework to strengthen market stability amid evolving forex conditions.
RBI Enhances FX Risk Reserve Framework
In Circular No. 26 dated October 10, 2026, the Reserve Bank of India reinforced its foreign exchange (FX) risk reserve mechanism as part of the ongoing review of the Master Direction on Risk Management and Inter-Bank Dealings (2016). The move is aimed at ensuring orderly functioning of the foreign exchange market amid volatile global financial conditions and increasing cross-border capital flows.
The RBI reiterated that Authorised Dealers must hold adequate FX risk reserves based on net open positions, stress-tested under various market scenarios. The updated guidance emphasizes dynamic risk assessment, requiring banks to review their FX exposure thresholds quarterly and report deviations promptly. Institutions with significant off-balance sheet FX derivatives are subject to additional buffer requirements.
These adjustments reflect the regulator’s proactive stance in preempting systemic risks arising from currency mismatches.
"It has been decided that Authorised Dealers shall maintain a risk-adjusted foreign exchange reserve commensurate with their trading volumes and counterparty exposure,"the circular notes, indicating a shift towards principle-based calibration rather than fixed percentages.
Practitioners advising financial institutions must now factor in these enhanced reserve expectations when structuring forex products or advising on hedging strategies. The changes also impact liquidity planning and internal risk governance frameworks within banks, calling for closer coordination between legal, treasury, and compliance teams.
Citations
- A.P. (DIR Series) Circular No. 26, October 10, 2026; Master Direction - Risk Management and Inter-Bank Dealings (July 05, 2016)
