RBI Tightens Rules on Rupee Forex Derivatives: No Rebooking, a $5 Million Limit and a No-Double-Hedging Undertaking
On 10 October 2026, the Reserve Bank of India (RBI) issued A.P. (DIR Series) Circular No. 25 (RBI/2026-27/291) to all Authorised Dealers (banks licensed to deal in foreign exchange). It amends the Master Direction: Risk Management and Inter-Bank Dealings of 5 July 2016, "in view of evolving market conditions".
No rebooking: If a user cancels any forex derivative contract involving the rupee, whether deliverable or non-deliverable, with any bank after these rules, no bank may let the user book it again. Rolling over a contract on its maturity date is still allowed.
Lower limit: Earlier, a user could hedge up to $100 million (notional value outstanding, across all banks) without proving that a real underlying exposure exists. A separate $100 million limit applied on stock exchanges for rupee currency pairs. Both limits are now $5 million.
Undertaking against double hedging: When a bank offers a rupee derivative to hedge a contracted exposure, it must take a written promise from the user that the same exposure is not already hedged with another bank. If it is hedged in parts with several banks, the amounts already booked must be shown.
Banks are responsible for checking compliance and must keep the documents for at least two years. The rules came into force immediately.
The RBI used its powers under Sections 10(4) and 11(1) of FEMA, 1999 and Section 45W of the RBI Act, 1934. A companion circular (No. 26) on the same day brought in a 20% Foreign Exchange Risk Reserve on large contracts where users buy foreign currency against the rupee.
Foreign Exchange Management Act (FEMA), 1999
FEMA is the main law that controls how money moves between India and other countries. Whenever someone in India buys or sells foreign currency, sends money abroad or receives investment from abroad, FEMA applies. It replaced the strict Foreign Exchange Regulation Act (FERA), 1973, and treats foreign exchange breaches as civil wrongs, not crimes. The RBI runs most of the day-to-day rules under it, in consultation with the central government.
The circular is a direction to Authorised Dealers under Sections 10(4) and 11(1) of FEMA. This is why the duty to check underlying exposure, take undertakings and keep documents for two years falls on the banks, not on the RBI.
Currency Hedging and the Forward Premium
Currency hedging means protecting yourself against a sudden change in the exchange rate. An importer who must pay dollars in three months can fix the rate today with a forward contract, so a fall in the rupee does not raise its cost. These contracts are called foreign exchange derivatives, because their value "derives" from the exchange rate. Banks offer them over the counter, and stock exchanges offer currency futures and options.
The RBI's three steps all target one problem: derivative positions larger than genuine needs. Banning rebooking, cutting the no-proof limit to $5 million and asking for an undertaking against double hedging make sure each contract matches a real exposure.
Non-Deliverable Forward (NDF) Market and Offshore Rupee Trading
A Non-Deliverable Forward (NDF) is a contract that lets someone protect against, or bet on, the future value of a currency without ever exchanging that currency. On the end date, the two sides only settle the difference between the agreed rate and the actual rate, usually in US dollars. NDFs in the rupee trade mainly in offshore centres like Singapore, London and Dubai, outside the RBI's direct control. Large one-way bets there can spill over and push the onshore rupee down.
The rebooking ban covers both deliverable and non-deliverable rupee contracts. By including non-deliverable contracts, the RBI closes the route of using NDFs through Indian banks to keep rolling fresh bets against the rupee.
- Circular: RBI/2026-27/291, A.P. (DIR Series) Circular No. 25, dated 10 October 2026, addressed to all Authorised Dealers
- Amends: Master Direction: Risk Management and Inter-Bank Dealings, 5 July 2016 (paragraphs 2.4(i), 2.4(iv) and 3.4(i) of Section I, Part A)
- Rebooking of cancelled rupee forex derivative contracts (deliverable or non-deliverable): not allowed; rollover on maturity allowed
- Limit for positions without establishing underlying exposure: $100 million to $5 million (with banks, and across all recognised stock exchanges)
- New undertaking: same exposure not hedged with another Authorised Dealer; part-hedges with other banks to be disclosed
- Document retention by banks: at least two years
- Effective: immediately
- Legal basis: FEMA, 1999 Sections 10(4) and 11(1); RBI Act, 1934 Section 45W
- Companion Circular No. 26: 20% Foreign Exchange Risk Reserve on eligible contracts above $2 million