RBI restricts rupee derivatives for non-residents to hedging, adds a new forex risk reserve

The Reserve Bank of India has tightened the rules governing non-deliverable rupee derivative contracts and foreign exchange hedging by Authorised Dealers, the banks and other entities licensed to deal in foreign exchange. Under its Master Direction on Risk Management and Inter-Bank Dealings, Authorised Dealer Category-I banks operating an IFSC Banking Unit, and standalone Primary Dealers authorised as Category-III dealers, could until now offer non-deliverable derivative contracts involving the rupee to non-resident users for any purpose. By a circular dated 12 October 2026, the RBI has restricted this: such contracts may now be offered to non-resident users only for the purpose of hedging.

Separately, the RBI has introduced a new Foreign Exchange Risk Reserve requirement for Authorised Dealers themselves. Where an Authorised Dealer enters into a foreign exchange derivative contract involving the rupee to hedge the currency risk on its own assets and liabilities, and is buying foreign currency against rupees under that contract, it must now maintain a cash reserve with the RBI equal to 20% of the rupee-equivalent notional value of the contract, deposited daily and held until the contract ends. Both directions apply to contracts entered into after the circular's issuance, and were 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.