RBI Revises Foreign Exchange Derivative Rules, Introduces 20% Cash Reserve Requirement

The Reserve Bank of India (RBI) announced changes to foreign exchange market regulations on October 10, 2026. As per a CNBC TV18 news report, the changes were set out in two circulars, A.P. (DIR Series) Circular No. 25 and A.P. (DIR Series) Circular No. 26. 

Authorised dealers will not be allowed to rebook foreign exchange derivative contracts involving the Indian rupee if the contracts were cancelled with any authorised dealer after the directions were issued.  

The restriction applies to both deliverable and non-deliverable contracts. Rolling over contracts on maturity will continue to be permitted under existing rules. 

Threshold Reduced to $5 Million 

The RBI has cut the threshold for foreign exchange derivative transactions used to hedge contracted exposures, where the underlying exposure is not established, from $100 million to $5 million equivalent across all authorised dealers. 

The limit for positions in exchange-traded currency derivatives involving the rupee has also been reduced from $100 million to $5 million equivalent.  

This applies to positions taken without establishing an underlying exposure across all recognised stock exchanges combined. 

Undertaking Required for Hedging 

Users entering into rupee-involving foreign exchange derivative contracts to hedge contracted exposures must provide an undertaking to authorised dealers.  

The dealers must obtain and retain this document. It must confirm that the same underlying exposure has not been hedged with another authorised dealer. 

Cash Reserve for Contracts Above $2 Million 

The RBI has introduced a Foreign Exchange Risk Reserve (FERR) for rupee-involving foreign exchange derivative contracts with a notional value exceeding $2 million equivalent. 

Authorised dealers must keep a cash reserve with the RBI equal to 20% of the rupee equivalent of the notional amount of each eligible transaction.  

The requirement covers contracts used to hedge current account exposures where users buy foreign currency against the rupee. 

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Conclusion 

The new rules change the limits for certain foreign exchange derivative transactions and set requirements for cancelled contracts, hedging declarations and cash reserves.  

The RBI said the measures aim to maintain orderly and transparent functioning of the foreign exchange market. 

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