RBI's 20% Foreign Exchange Risk Reserve: How the New Rule on Rupee Hedging Works
On 15 October 2026, the Reserve Bank of India (RBI) issued FAQs (frequently asked questions) to explain its new Foreign Exchange Risk Reserve (FERR). The FERR came through two RBI directions dated 10 and 12 October 2026.
Under the rule, a bank must keep 20% of the rupee value of certain currency contracts as cash with the RBI. A contract with a customer is covered only if it is above $2 million, involves the rupee, and the customer is buying foreign currency to hedge (protect) a current account payment such as an import bill.
The rule does not cover contracts where customers sell foreign currency, contracts that do not involve the rupee, or hedges of capital account deals. Hedges of interest on foreign loans (ECBs), coupons on Indian bonds held by foreigners and dividends to foreign investors are also left out, because they arise from capital account deals.
The reserve earns no interest. It is kept separate from the Cash Reserve Ratio (CRR), and it cannot be counted as a high-quality liquid asset for the Liquidity Coverage Ratio. Banks must report it daily to the RBI by 5 pm on the next working day.
The 12 October direction extends the 20% reserve to banks' own hedges of their assets and liabilities when they buy foreign currency against the rupee. It does not cover banks' market-making or trading positions.
The package came as the rupee stayed near record lows of about 96 to 97 per dollar. The same steps cut the limit for hedging without proof of exposure from $100 million to $5 million, and banned rebooking of cancelled rupee contracts.
Foreign Exchange Risk Reserve (FERR)
A Foreign Exchange Risk Reserve (FERR) is a cash deposit that a central bank asks banks to keep when they sell foreign currency for the future against the home currency. The bank earns nothing on this deposit. Because the money is locked up, the bank's cost goes up, and it passes that cost to the customer. So buying dollars in advance becomes more costly, and fewer people rush to buy dollars when the home currency is falling.
The RBI's FAQs settle exactly which contracts attract the new 20% reserve. By making advance dollar buying costlier, the RBI wants to reduce the rush for dollars that was adding pressure on a weak rupee. Firms that import goods now need to check whether their hedges cross the $2 million line and how their banks will price the extra cost.
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 the rate today through a contract, such as a forward contract. The extra price paid to buy dollars for a future date, compared with today's rate, is called the forward premium. In India, it mostly reflects the gap between Indian and US interest rates.
The FERR works by making one type of hedge, buying dollars forward, more expensive. Students should see it as a tool that changes the cost of hedging, not the exchange rate directly.
Foreign Exchange Management Act (FEMA), 1999
FEMA is the main law that controls how money moves between India and the rest of the world. It replaced the stricter Foreign Exchange Regulation Act (FERA), 1973, and came into force on 1 June 2000. FEMA divides all foreign money deals into two types: current account transactions and capital account transactions. This split decides how freely a deal is allowed.
The FERR applies only to hedges of current account transactions, so the FEMA split between current and capital account decides which contracts carry the 20% reserve. The RBI's FAQs use this very line to exempt payments like ECB interest and dividends.
- FERR rate: 20% of the INR value of the notional amount, held daily as cash with the RBI, earning no interest
- Threshold for customer contracts: above $2 million
- Covered: rupee contracts where the customer buys foreign currency to hedge a current account transaction
- Exempt: selling foreign currency, non-rupee contracts, capital account hedges, hedges of ECB interest, bond coupons and dividends to non-residents, banks' trading positions
- RBI directions: 10 October and 12 October 2026; FAQs: 15 October 2026
- Limit for hedging without proof of exposure: cut from $100 million to $5 million
- RBI repo rate raised to 5.50% on 7 October 2026 (first hike since February 2023)
- China's PBoC first used a 20% FX risk reserve in 2015 and cut it to zero in March 2026