RBI answers questions on the new 20% forex risk reserve
RBI's FAQs explain which currency hedges need the 20% Foreign Exchange Risk Reserve, how it is calculated, that it earns no interest, and which deals are left out.
Official title: RBI issues Frequently Asked Questions on Foreign Exchange Risk Reserve · Press Release 2026-2027/1334
What happened
On October 10 and 12, 2026, RBI required banks to keep a Foreign Exchange Risk Reserve (FERR) with it: 20% of the rupee value of certain currency hedges, in cash and without interest. It has now published FAQs to clear up how this works. The reserve applies to a customer's rupee derivative contract only if all five conditions are met: it involves the rupee, it is with a customer, the customer is buying foreign currency, it is above US$2 million, and it hedges current account transactions such as imports.
Key answers: hedges where the customer sells foreign currency (typical for exporters) are exempt. Hedges of capital account deals are exempt, and so are hedges of interest, coupon or dividend payments that flow from foreign borrowing or investment. Contracts of US$2 million or less are exempt, but banks must guard against splitting deals to stay under the limit; for option combinations, the largest single option decides. The worked example: a US$10 million hedge at ₹95 per dollar is ₹95 crore, so the reserve is ₹19 crore. Contracts made before the rules are exempt, but rolling one over afterwards counts as a new contract.
For banks: the reserve is kept in their current account with RBI on top of the cash reserve ratio, from the next working day until a day after the contract ends, and shrinks pro rata on part-cancellation. It earns no interest, does not count as high-quality liquid assets, and must be reported daily through RBI's CIMS system by 5 pm the next working day. Under Circular 27, banks also keep it on hedges of their own assets and liabilities where they buy foreign currency, but not on market-making or trading positions or on deals with RBI. Circular 27 also limits non-deliverable rupee contracts for non-residents to hedging only.
What it means for you
No direct effect on individuals. Buying currency for travel or sending money abroad is not a derivative hedge, so the reserve doesn't apply. It matters indirectly as part of RBI's effort to keep the rupee steady.
What it means for businesses
Importers hedging more than US$2 million at a time should expect banks to price in the cost of locking up 20% at no interest; exporters and hedges of loan interest or dividends are outside it. Rolling over old hedges now brings them under the reserve. Banks must set up daily calculation, audit trails and CIMS reporting.
Links in this release, explained
- A.P. (DIR Series) Circular No. 26, October 10, 2026
The original rule creating the FERR for customers' rupee hedges above US$2 million where they buy foreign currency for current account deals: 20% in cash with RBI until the contract ends, with deal-splitting treated as a violation. Read it for the exact legal wording.
rbi.org.in/scripts/NotificationUser.aspx?Id=13738&Mode=0 - A.P. (DIR Series) Circular No. 27, October 12, 2026
The follow-up rule. It extends the 20% FERR to banks' own hedges of their assets and liabilities where they buy foreign currency, and says banks may now offer non-deliverable rupee derivatives to non-residents only for hedging. For bank treasuries and foreign investors using offshore rupee contracts.
rbi.org.in/scripts/NotificationUser.aspx?Id=13739&Mode=0 - FAQs on the Foreign Exchange Risk Reserve
RBI's 22 questions and answers: which contracts are covered, exemptions (exporters, capital account and interest or dividend hedges, contracts up to US$2 million, older contracts), the ₹19 crore worked example, rollovers, part-cancellations, no interest, not counted as liquid assets, and daily CIMS reporting. The most practical document here for importers and bank forex desks.
rbi.org.in/Scripts/FAQDisplay.aspx?Id=180
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.