RBI tightens currency hedging rules and adds 20% reserve on dollar buys
To keep the forex market orderly, RBI barred rebooking of cancelled rupee hedges, cut the no-proof hedging limit to $5 million and made banks park 20% of large dollar-buying hedges with it.
Official title: RBI Announces Regulatory Measures for the Foreign Exchange Market · Press Release 2026-2027/1305
What happened
On October 10, 2026, RBI announced four rules for currency derivatives involving the rupee, such as forward contracts that let an importer lock in today's exchange rate for a future dollar payment. RBI says the aim is 'orderly functioning' of the forex market, market discipline and proper risk management. The release does not mention the rupee's level. For context, the Governor's statement of October 7 noted a strong dollar, crude oil near US$116 a barrel in September, and US$10.3 billion of net foreign portfolio outflows since April, all of which push up demand for dollars.
First, once a rupee derivative contract is cancelled with any bank, it cannot be rebooked. Rolling over a contract at maturity is still allowed. Second, users could earlier hedge up to US$100 million without proving they had a real underlying exposure (an actual import or export deal); that limit is now US$5 million, both with banks and on stock exchange currency futures. Third, when a customer hedges, the bank must take a written undertaking that the same exposure has not been hedged with another bank. Together these make it harder to use 'hedges' as one-way bets on the rupee.
Fourth, RBI created a Foreign Exchange Risk Reserve (FERR). For rupee derivative contracts above US$2 million where the customer is buying foreign currency to hedge current account payments (mainly imports and services), the bank must keep 20% of the contract's rupee value with RBI in cash, earning no interest, until the contract ends. RBI's FAQs give an example: a US$10 million hedge at ₹95 per dollar is ₹95 crore, so ₹19 crore must be parked. It applies only to contracts made after October 10. Circular 25 and the FERR took effect immediately.
What it means for you
These rules cover hedging contracts used mostly by companies and banks. Buying dollars for a trip, paying fees abroad or sending money to family under normal channels are not derivative contracts, so they are not directly affected. The broader goal is a steadier rupee, which matters for the price of imported goods.
What it means for businesses
Importers who hedge more than US$2 million at a time will likely find forward cover costlier, since banks must lock up 20% of the value with RBI at no interest and may pass that cost on. Anyone hedging above US$5 million must now show a real underlying deal, and cancelled hedges can't be rebooked, so plan hedges carefully. Exporters selling dollars forward are not covered by the FERR.
Links in this release, explained
- A.P. (DIR Series) Circular No. 25, October 10, 2026
The circular to banks that bans rebooking of cancelled rupee derivative contracts (rollovers allowed), cuts the no-proof hedging limit from US$100 million to US$5 million (both with banks and across stock exchanges), and requires an undertaking that the same exposure isn't hedged elsewhere. Banks must keep supporting documents for at least two years. Read it if your company hedges currency risk.
rbi.org.in/scripts/NotificationUser.aspx?Id=13737&Mode=0 - A.P. (DIR Series) Circular No. 26, October 10, 2026
The circular creating the Foreign Exchange Risk Reserve: 20% of the rupee value of each rupee derivative over US$2 million where a customer buys foreign currency to hedge current account deals, kept in cash with RBI daily until the contract ends. Splitting deals to dodge the threshold counts as a violation. It applies to contracts after October 10. For importers, treasurers and bank forex desks.
rbi.org.in/scripts/NotificationUser.aspx?Id=13738&Mode=0
Read the original
Press release on rbi.org.in ↗ Official PDF ↗
This explainer simplifies the official text. If anything here differs from the RBI's release, the release is right.