RBI clarifies new Foreign Exchange Risk Reserve requirement for hedging rupee exposures

The Reserve Bank of India has issued Frequently Asked Questions clarifying a new Foreign Exchange Risk Reserve (FERR) requirement, introduced through A.P. (DIR Series) Circular No. 26 dated 10 October 2026 and Circular No. 27 dated 12 October 2026. Under the FERR, Authorised Dealers, such as banks dealing in foreign exchange, must maintain a reserve with the RBI in respect of two kinds of transactions: specified foreign exchange derivative contracts involving the rupee that an Authorised Dealer enters into with a user who is purchasing foreign currency against rupees to hedge a current account transaction of notional value exceeding USD two million, and derivative contracts an Authorised Dealer itself undertakes to hedge the currency risk of its own assets and liabilities where it is purchasing foreign currency against rupees. The FAQs clarify that the FERR does not apply where a user sells, rather than buys, foreign currency against rupees, where the contract hedges a capital account transaction, where the contract does not involve the rupee at all, or to an Authorised Dealer's market-making or proprietary trading positions.

Derivative contracts hedging current account outflows that arise from an underlying capital account transaction, such as interest on External Commercial Borrowings or dividends to non-resident investors, are excluded from the user-side requirement under Circular No. 26 but remain covered by the Authorised Dealer's own-hedging requirement under Circular No. 27. The RBI has cautioned Authorised Dealers against structuring transactions to avoid the reserve requirement.