RBI Steps In to Support the Rupee Near 96.78 per Dollar: Curbs on Forex Derivatives and a 20% Risk Reserve
On 10 October 2026, the Reserve Bank of India (RBI) brought in new rules to reduce pressure on the rupee, which was trading near ₹96.78 per US dollar, close to its record low.
The rules were issued through two circulars to Authorised Dealer banks (banks licensed by the RBI to deal in foreign currency): A.P. (DIR Series) Circular No. 25 and No. 26.
No rebooking: Once a company cancels a rupee forex derivative contract (deliverable or non-deliverable) with any bank, it cannot book it again. Rolling over a contract when it matures is still allowed.
Lower limit for "no-proof" positions: A user could earlier take forex derivative positions of up to $100 million without proving that it has a real foreign currency exposure. This limit is now $5 million, both with banks and on stock exchanges.
20% Foreign Exchange Risk Reserve (FERR): For large contracts (above $2 million) in which a user buys foreign currency against the rupee to hedge current account payments, the bank must keep 20% of the rupee value of the contract as cash with the RBI until the contract ends. Users also have to declare that the same exposure is not already hedged with another bank.
The RBI said the aim is to keep the forex market orderly, improve market discipline and make sure derivatives are used for genuine risk management, not for betting on a falling rupee.
Exchange Rate Management in India: RBI's Managed Float
The exchange rate is the price of one currency in terms of another, for example how many rupees one US dollar costs. In India, this price 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, by selling or buying dollars from its foreign exchange reserves. This mix of market freedom and central bank control is called a managed float.
Selling dollars from reserves is costly and the reserves are limited. With the rupee near ₹96.78, the RBI chose the second route as well: it changed derivative rules so that companies and traders find it harder and costlier to bet on a weaker rupee, which reduces the demand for dollars in the market.
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 can fix the exchange rate today through a contract, so a later fall or rise in the rupee does not hurt it. Common hedging tools are forwards, futures, swaps and options, together called foreign exchange derivatives. In India, banks offer these contracts "over the counter" under RBI rules, and stock exchanges offer currency futures and options.
The new rules make sure that rupee derivatives are used for real hedging. The cut in the "no-proof" limit from $100 million to $5 million, the ban on rebooking and the undertaking against double hedging all close routes through which users could build large bets against the rupee.
Capital Account Convertibility in India
Capital account convertibility (CAC) means the freedom to change local currency into foreign currency, and back, for buying assets abroad or bringing in foreign money as investment or loans. For example, if an Indian can freely change rupees into dollars to buy a flat in Dubai or shares in a US company, without any limit, the rupee is "fully convertible on the capital account". India allows this only partly. It follows a careful, step-by-step approach and keeps some controls in its hands.
The RBI's new 20% Foreign Exchange Risk Reserve works like an unremunerated reserve requirement, very similar to China's 2015 tool. Along with the lower $5 million limit and the ban on rebooking, it shows India's calibrated approach in action: when the rupee is under stress, the RBI uses temporary controls to slow speculative demand for dollars instead of relying only on its reserves.
- Rupee level when the RBI acted: about ₹96.78 per US dollar (October 2026), close to its record low
- Circulars: A.P. (DIR Series) Circular No. 25 and No. 26, both dated 10 October 2026
- Rebooking of cancelled rupee forex derivative contracts (deliverable or non-deliverable): barred; rollover on maturity allowed
- Limit for positions without proving underlying exposure: cut from $100 million to $5 million (OTC with banks and on exchanges)
- Foreign Exchange Risk Reserve: 20% of the rupee value of eligible contracts above $2 million, kept in cash with the RBI daily till the contract ends
- FERR applies to contracts hedging current account deals where the user buys foreign currency against the rupee
- Splitting deals to stay below the threshold counts as a violation
- Banks must keep supporting documents for at least two years
- Legal powers used: Sections 10(4) and 11(1) of FEMA, 1999, and Section 45W of the RBI Act, 1934