RBI Tightens Forex Derivative Rules to Curb Speculation on the Rupee
On 10 October 2026, the Reserve Bank of India (RBI) issued new rules for foreign exchange derivatives (contracts that fix or protect a future rupee-dollar rate). The aim is to cut speculative demand for dollars and support the rupee.
Banks (called "authorised dealers") can no longer let a customer rebook a rupee forex contract once it has been cancelled, whether deliverable or non-deliverable. Rolling over a contract when it matures is still allowed.
The limit up to which a user can take rupee derivative positions without showing documents of a real underlying exposure was cut from USD 100 million to USD 5 million. This also covers exchange-traded rupee currency derivatives.
A new Foreign Exchange Risk Reserve (FERR) applies: for eligible contracts above USD 2 million where the user buys dollars against rupees to hedge current account deals, the bank must keep 20% of the rupee value as cash with the RBI until the contract ends. Banks must report it daily.
Users must also give an undertaking that the same exposure has not been hedged with another bank. Separately, from 12 October, the RBI will supply the full daily dollar needs of three state-run oil companies (IOC, BPCL, HPCL) through a special window.
The rupee closed near 96.7 per dollar on 9 October, close to its all-time low of 96.96 (May 2026). Forex reserves fell to about USD 734.6 billion in the week ended 2 October, about USD 51 billion below the September record of about USD 785.7 billion.
Currency Hedging and the Forward Premium
Currency hedging means protecting yourself against a sudden change in the exchange rate. A business that will need dollars in the future can fix today the rate at which it will buy them, using a contract such as a forward. If the rupee then falls, the business is safe. Hedging is meant to reduce risk, while speculation means taking a position only to profit from a price move.
The RBI found that some of the dollar buying in the forward market was speculation dressed up as hedging. By cutting the no-documents limit, banning rebooking and adding the 20% reserve, it is forcing derivatives back to their real purpose: protecting genuine business deals.
Non-Deliverable Forward (NDF) Market and Offshore Rupee Trading
A Non-Deliverable Forward (NDF) is a contract to bet on, or protect against, the future value of a currency without ever exchanging that currency. At the end, only the profit or loss is paid, usually in US dollars. The offshore rupee NDF market works in financial centres such as Singapore, Dubai and London, outside the RBI's direct control. When heavy betting against the rupee happens there, it can spill over and weaken the rupee at home.
The new rules reach non-deliverable contracts too, so speculators cannot simply move from onshore deliverable hedges to NDF-style bets through Indian banks. This is the RBI's second attempt in 2026 to squeeze speculation linked to offshore rupee trading.
Exchange Rate Management in India: RBI's Managed Float
India's exchange rate is the price of the rupee in terms of other currencies, for example how many rupees one US dollar costs. In India, this price is set mainly by the market, through the demand and supply of dollars. But the RBI steps in when the rupee moves too sharply. This system is called a managed float: the rupee floats, but the RBI smooths out wild swings without defending any fixed level.
Rather than only selling dollars from reserves, the RBI is now cutting dollar demand at the source: speculative derivative bets and the oil companies' large daily purchases. Using rules instead of reserves helps protect the reserves while still steadying the rupee.
- Date of new rules: 10 October 2026
- No-documents limit for rupee derivatives: cut from USD 100 million to USD 5 million (also covers exchange-traded currency derivatives)
- Rebooking of cancelled rupee forex derivatives: banned (deliverable and non-deliverable); rollovers on maturity allowed
- Foreign Exchange Risk Reserve (FERR): 20% of rupee value, cash with RBI, for eligible contracts above USD 2 million where users buy forex against rupee for current account hedges; reported daily through RBI's CIMS
- Special dollar window for IOC, BPCL, HPCL: from 12 October 2026
- Rupee: about 96.7 per USD (9 October 2026); all-time low 96.96 (May 2026)
- Forex reserves: about USD 734.6 billion (week ended 2 October 2026); record about USD 785.7 billion (September 2026)
- Repo rate: raised 25 bps to 5.50% on 7 October 2026