The Reserve Bank of India has removed the prudential ceiling on banks' non-option rupee derivative exposures. Through two parallel amendment directions issued on 19 October 2026 — one for commercial banks and one for small finance banks — the RBI has deleted paragraph 37 of the Miscellaneous Directions, 2025, which capped the gross PV01 of non-option rupee derivative contracts at 0.25% of a bank's net worth. Both amendments take effect immediately.
What exactly happened
On 19 October 2026, the RBI issued two amendment directions under Section 35A of the Banking Regulation Act, 1949:
The operative clause in each notification is word-for-word identical:
"Section C on 'Limits for Non-Option Derivative Contracts' of Chapter IV of the … Directions, 2025 (paragraph 37 of the Directions) stands deleted."
Both state that the amended instructions "shall come into effect immediately upon issuance" — i.e., from 19 October 2026 itself. Both are signed by Sunil T S Nair, Chief General Manager.
Old vs new: what paragraph 37 said
To understand the significance, here is the deleted paragraph 37 as it stood in the 2025 parent Directions (verified from the official text):
Old paragraph 37: "The gross PV01 of all non-option rupee derivative contracts (including rupee-foreign currency contracts) of a bank shall be within 0.25 per cent of its net worth as on the last balance sheet date. The limit shall, however, exclude the PV01 of derivatives which are hedges for balance sheet exposures provided these hedges meet the criteria of hedge effectiveness as laid down in circular IDMC.MSRD.4801/06.01.03/2002-03 dated June 3, 2003 (as amended from time to time)."
What is PV01? A plain-English explainer
PV01 (present value of a 01) measures how much a portfolio's value changes when interest rates move by one basis point (0.01%). It is the standard gauge of interest-rate risk in a derivatives book. Non-option rupee derivatives are contracts without optionality — principally forwards and swaps, including rupee–foreign currency forwards and cross-currency swaps that banks use for hedging and market-making.
The deleted rule therefore did one simple thing: it tied the size of a bank's non-option rupee derivative book (measured by interest-rate sensitivity) to the size of the bank — no more than 0.25% of net worth. A bank wanting a bigger derivatives book had to either grow its net worth or shrink the book.
Why this matters — analysis
ANALYSIS — the following interprets the change; the RBI's notifications state no reason beyond "on a review" and public interest.
- More headroom for treasury desks. Banks whose non-option derivative books were brushing against the 0.25% ceiling — typically active market-makers in forex forwards and interest-rate swaps — can now size positions on commercial and risk-management considerations rather than a fixed net-worth ratio.
- Deregulatory signal. Removing a hard quantitative cap (rather than recalibrating it) suggests the RBI is comfortable relying on banks' internal risk frameworks, board-approved limits, and the broader market-risk capital regime instead of this standalone backstop.
- Smaller banks gain relatively more. Because the cap was a percentage of net worth, it bit hardest on smaller balance sheets. Small finance banks — whose net worth bases are modest — faced the tightest absolute constraint, so the deletion is proportionally more freeing for them.
- Hedge accounting unchanged. The carve-out for hedge-effective balance-sheet hedges disappears with the cap, but hedge-effectiveness discipline under the 2003 circular and Ind AS 109 continues to govern how banks designate and measure hedges.
Who is affected
- Commercial banks — treasury and global markets desks dealing in rupee derivatives, forex forwards, and cross-currency swaps.
- Small finance banks — same, with relatively greater relief given smaller net-worth bases.
- Corporate treasurers — bank counterparties may now offer larger derivative lines; pricing and availability of forwards/swaps could improve at the margin.
- Compliance and risk teams — internal limit frameworks referencing paragraph 37 or the 0.25% cap need updating; board-approved market-risk policies should be reviewed.
What banks should do next
- Update limit-monitoring systems — remove or re-flag the 0.25%-of-net-worth PV01 check so it stops generating breach alerts from 19 October 2026.
- Review board-approved market-risk policies — decide whether to retain an internal PV01/net-worth guardrail voluntarily or replace it with desk-level limits.
- Brief the treasury desk — traders should know the regulatory ceiling is gone but internal and counterparty limits still bind.
- Check reporting templates — any regulatory or internal return capturing compliance with paragraph 37 needs amendment.
- File the notifications — RBI/2026-27/294 (commercial banks) and RBI/2026-27/295 (SFBs), both dated 19.10.2026, against the 2025 Miscellaneous Directions in the compliance library.
Frequently asked questions
Q: Which banks do the 19 October 2026 amendments apply to?
RBI/2026-27/294 applies to commercial banks under the (Commercial Banks – Miscellaneous) Directions, 2025, and RBI/2026-27/295 applies to small finance banks under the (Small Finance Banks – Miscellaneous) Directions, 2025. The operative change is identical in both.
Q: From when is the deletion effective?
Immediately — both notifications state the amended instructions "shall come into effect immediately upon issuance," i.e., 19 October 2026.
Q: Does the removal of the cap mean banks face no limits on derivatives now?
No. Only this specific 0.25%-of-net-worth PV01 backstop is gone. Banks remain bound by their board-approved market-risk limits, counterparty exposure norms, capital adequacy requirements for market risk, and all other applicable RBI directions on derivatives.
Q: Were option contracts covered by the deleted cap?
No — paragraph 37 applied only to non-option rupee derivative contracts (forwards, swaps, including rupee–foreign currency contracts). Option-related provisions, such as the deferment of option premium in paragraph 38, are untouched.
Q: What was the legal authority for these amendments?
Section 35A of the Banking Regulation Act, 1949, which empowers the RBI to issue directions to banking companies in the public interest.
Sources
- Primary: RBI Notification RBI/2026-27/294 — (Commercial Banks – Miscellaneous) Second Amendment Directions, 2026 (19.10.2026) — notification page | official PDF
- Primary: RBI Notification RBI/2026-27/295 — (Small Finance Banks – Miscellaneous) Amendment Directions, 2026 (19.10.2026) — notification page | official PDF
- Reference (old position): (Small Finance Banks – Miscellaneous) Directions, 2025 and (Commercial Banks – Miscellaneous) Directions, 2025 — paragraph 37, Section C, Chapter IV (verified via RBI website).
Verified against the official RBI notifications on 19 October 2026. The "Why this matters" section is interpretive analysis; all factual claims trace to the notifications linked above.
