Business · Companies · 10 hrs ago
RBI clarifies 20% reserve rules for some forex derivatives
The Reserve Bank of India clarified its new foreign exchange risk reserve rules in FAQs issued on 15 October 2026.
The rules cover certain currency derivatives involving the rupee, including contracts banks make with users and some hedges of banks’ own risks.
For user contracts, the reserve applies when the user buys foreign currency against rupees to hedge a current account transaction and the contract’s notional value is above $2 million.
Banks must set aside 20% of the rupee value of each eligible contract in their account with the RBI, starting the next working day after the contract is made and continuing until a day after it ends.
The reserve earns no interest and cannot count as a high-quality liquid asset.
The RBI said some payment hedges and banks’ market-making trades are exempt, including user hedges for interest on external commercial borrowings, certain bond coupons and dividends to non-residents.
The FAQs also say that if a partial cancellation takes the remaining contract below the threshold, the reserve requirement stops from the following day.
The Reserve Bank of India clarified how its 20% Foreign Exchange Risk Reserve requirement applies to certain rupee-linked currency derivatives.
The requirement applies to eligible contracts in which a user buys foreign currency against the rupee and the notional value exceeds $2 million.
Banks must maintain the reserve daily in their current accounts with the RBI until a day after the derivative contract ends.
The RBI said the requirement does not cover certain hedges of payments linked to capital account transactions, or banks’ market-making and proprietary positions.
The clarification also addresses how the threshold applies and what happens when a contract is partly cancelled.
- Who
- The Reserve Bank of India issued the clarification for authorised dealer banks and users of currency derivatives.
- What
- It clarified the scope of the 20% Foreign Exchange Risk Reserve requirement for certain forex derivatives.
- When
- The FAQs were issued on 15 October 2026.
- Where
- India.
- Why
- To clarify which contracts are subject to the reserve, how it is maintained and which transactions are exempt.
This story does not have two clearly opposing sides.
The RBI issued one of the directions preceding its FERR clarification.
The RBI issued a separate direction covering certain derivatives banks enter into to hedge their own currency risks.
The RBI issued FAQs clarifying the FERR requirement.
- Reserve rate
- 20% of the rupee-equivalent notional amount
- Threshold
- Notional value exceeding $2 million
- Deposit location
- Authorised dealer’s current account with the RBI
- Maintenance period
- From the working day after the contract is entered into until a day after it terminates
- Part cancellation
- FERR ceases from the following day if the remaining valid notional falls below the threshold
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What people are saying
FERR is applicable for authorised dealers with notional value exceeding $2 million but banks must guard against any attempt towards structuring of derivative transactions for avoidance of these provisions
Upon part cancellation of the derivative contract, if the notional amount of the derivative contract which is still valid falls below the applicable threshold, the FERR requirement for such derivative contracts will cease, from the day following such reduction