RBI requires a 20% Foreign Exchange Risk Reserve on large dollar-rupee hedging contracts

By A.P. (DIR Series) Circular No. 26 dated 10 October 2026, the Reserve Bank of India directed all Authorised Dealers (ADs) to maintain a Foreign Exchange Risk Reserve (FERR) for certain rupee-denominated foreign exchange derivative contracts entered into with users. The requirement applies where a contract's notional value exceeds USD 2 million equivalent, the contract hedges a current account transaction, and the user is buying foreign currency against the rupee. For every such contract, the AD must deposit cash equal to 20% of the rupee equivalent of the notional amount with the RBI, maintaining the reserve on a daily basis until the contract terminates, and must report FERR details daily through the RBI's Centralised Information Management System.

Splitting a transaction across one or more ADs to avoid triggering the requirement is itself treated as a violation. The circular, issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 and Section 45W of the Reserve Bank of India Act, 1934, takes effect immediately and points Authorised Dealers to the Master Direction -- Risk Management and Inter-Bank Dealings dated 5 July 2016, as amended. The RBI said the measure, announced the same day as a parallel tightening of hedging and rebooking rules, is meant to ensure orderly functioning of the foreign exchange market.