RBI Tightens Rules for Rupee Forex Derivatives and Brings in a 20% Foreign Exchange Risk Reserve
The Reserve Bank of India (RBI) issued two circulars, A.P. (DIR Series) Circular Nos. 25 and 26, with new rules for the foreign exchange (forex) market. It said the aim is to keep the market orderly given "evolving conditions".
No rebooking: Banks dealing in forex (called Authorised Dealers) cannot let users rebook any rupee forex derivative contract, deliverable or non-deliverable, once it has been cancelled after these rules. Rolling over a contract when it matures is still allowed.
Lower limit for hedging without proof: Earlier, a user could hedge up to USD 100 million of contracted exposure without first showing proof of the real underlying deal. This limit is now USD 5 million, across all banks together. The same cut (USD 100 million to USD 5 million) applies to exchange-traded rupee currency derivatives across all recognised stock exchanges together.
Extra paperwork: Users must give a written undertaking that the same exposure has not already been hedged with another bank.
New Foreign Exchange Risk Reserve (FERR): For rupee derivative contracts above USD 2 million in notional value that hedge current account exposures where the user buys foreign currency against the rupee (for example, an importer buying dollars forward), the bank must keep 20% of the rupee value of the contract as cash with the RBI.
The RBI said the steps will strengthen market discipline and risk management. These steps follow earlier curbs in April 2026, when the rupee fell to record lows beyond 94 per US dollar amid the West Asia conflict and high oil prices.
Currency Hedging and the Forward Premium
Currency hedging means protecting yourself against a sudden change in the exchange rate. A business that will need or receive dollars in the future fixes the exchange rate today through a contract, so a later move in the rupee does not hurt it. The extra price paid to buy dollars in the future, compared with today's price, is called the forward premium. In India, hedging using contracts linked to the rupee is regulated by the RBI under the Foreign Exchange Management Act (FEMA), 1999.
The RBI's new rules target the edges where hedging can turn into speculation: rebooking cancelled contracts, hedging large amounts without proof, and hedging the same exposure twice with different banks. The FERR adds a cost to forward dollar purchases, which reduces pressure on the rupee from heavy forward dollar buying.
Exchange Rate Management in India: RBI's Managed Float
India's exchange rate, for example how many rupees one US dollar costs, is mostly set by the market through the demand for and supply of dollars. But the RBI steps in when the rupee moves too sharply. This mix of market freedom and central bank action is called a managed float. The RBI does not aim for any fixed level of the rupee; it aims to reduce excessive volatility (sudden, large swings).
Instead of only selling dollars from its reserves, the RBI is using rules to cut speculative demand for dollars in the derivatives market. This is a classic managed-float tool: it calms the market without fixing the rupee at a particular level.
Non-Deliverable Forward (NDF) Market and Offshore Rupee Trading
A Non-Deliverable Forward (NDF) is a contract that lets someone bet on, or protect against, the future value of a currency without ever exchanging that currency. On the end date, the two sides only pay each other the difference between the agreed rate and the actual market rate, usually in US dollars. NDFs are mostly used for currencies like the Indian rupee that cannot be freely moved in and out of the country. A large rupee NDF market exists offshore (outside India), in financial centres such as Singapore, London, Dubai and New York.
The new ban on rebooking covers both deliverable and non-deliverable rupee contracts, closing a route used to trade on rupee swings. Together with the lower no-proof threshold and the FERR, it limits how far speculative positions in rupee derivatives, including those linked to the NDF market, can add pressure on the rupee.
- Circulars: A.P. (DIR Series) Circular Nos. 25 and 26, issued 10 October 2026 (Press Release 2026-2027/1305)
- Rebooking of cancelled rupee forex derivative contracts (deliverable or non-deliverable): not allowed; rollover at maturity still allowed
- Threshold for hedging contracted exposures without proving the underlying exposure: cut from USD 100 million to USD 5 million (across all Authorised Dealers)
- Same threshold for exchange-traded rupee currency derivatives: cut from USD 100 million to USD 5 million (across all recognised stock exchanges)
- Foreign Exchange Risk Reserve (FERR): 20% of the rupee value of the notional amount, kept in cash with the RBI, for contracts above USD 2 million that hedge current account exposures where the user buys foreign currency against the rupee
- Earlier curbs: 1 April 2026 (non-deliverable derivatives ban, rebooking limits, USD 100 million net open position cap on banks); partly withdrawn 20 April 2026
- Rupee record low: about 94.84 per US dollar (end of March 2026)