RBI sets 20% Foreign Exchange Risk Reserve on rupee hedges above USD 2 million
Key points
- Banks must keep cash with RBI equal to 20% of the rupee equivalent of the notional amount of certain rupee forex derivative contracts.
- It applies to contracts above USD 2 million that hedge current account transactions where the customer buys foreign currency against the rupee.
- The reserve covers contracts undertaken after the circular was issued on 10 October 2026 and is kept in cash daily until each contract ends.
The Reserve Bank of India (RBI) has introduced a Foreign Exchange Risk Reserve (FERR) on large rupee forex hedges where the customer is buying foreign currency. Under A.P. (DIR Series) Circular No. 26 dated 10 October 2026, banks must keep 20 per cent of the rupee value of each such contract as cash with RBI for as long as the contract runs. RBI says the measure is intended to ensure the orderly functioning of the foreign exchange market.
What has changed
Authorised Dealers (banks permitted to deal in foreign exchange) must now maintain an FERR for foreign exchange derivative contracts involving the rupee that they undertake with users. The circular refers to the Master Direction – Risk Management and Inter-Bank Dealings dated 5 July 2016. Its main terms are:
| Feature | What the circular says |
|---|---|
| Contracts covered | All foreign exchange derivative contracts involving the rupee with a notional value exceeding USD two million equivalent |
| Purpose of the contract | Hedging current account transactions |
| Direction of the deal | The user is purchasing foreign currency against the rupee |
| Size of the reserve | 20 per cent of the rupee equivalent of the notional amount of each contract |
| Form and period | Deposited and maintained in cash in India with RBI on a daily basis, until the contract is terminated |
| Reporting | Banks report the FERR maintained daily through RBI’s Centralised Information Management System (CIMS) |
| Start | Contracts undertaken after the issuance of the directions |
The circular also says that any attempt by users to get around the conditions for coverage set out above, including the USD two million threshold, by undertaking multiple transactions with one or more banks will be considered a violation of the directions.
The directions are 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.
Who is affected
The obligation to keep the reserve is on banks, not on their customers. The contracts it covers, however, are those of businesses that use derivative contracts in which they buy foreign currency to hedge current account transactions, such as payments for imported goods or services, where a single contract exceeds USD 2 million. Contracts where the user sells foreign currency, as exporters typically do when hedging receivables, are outside the reserve as the circular describes it. The circular does not mention hedges of capital account transactions.
What this means for businesses
In practice, this means:
- For every covered contract, the bank has to set aside cash equal to 20 per cent of its rupee value for the full life of the contract. The circular says nothing about pricing, but importers and other buyers of foreign currency may find this cost reflected in the quotes they get for large hedges.
- Breaking a large hedge into several smaller deals below USD 2 million, with the same bank or different banks, to avoid the reserve is expressly treated as a violation.
- The reserve applies to contracts undertaken after the circular was issued, so hedges booked before then are outside its terms.
- Finance teams that regularly buy foreign currency for imports or other overseas payments may want to discuss hedge size, cost and documentation with their banks and advisers.
Key dates
- 10 October 2026: circular issued; the reserve applies to covered contracts undertaken after issuance.
- Daily, until each contract ends: banks maintain the reserve with RBI and report it through CIMS.
This update was written with AI from the official source above and automatically fact-checked against it before publishing. It is general information, not professional advice. Check the source, or talk to a Chartered Accountant, before acting on it.