RBI Forex Derivative Curbs: FERR, $5 mn Limit | CLAT GK

CURRENT AFFAIRS | 12 OCTOBER 2026

The Reserve Bank of India (RBI) has tightened the rules on rupee-linked foreign exchange derivatives. In a press release dated Saturday, 10 October 2026 (Press Release 2026-2027/1305), the RBI announced that it had issued two circulars to banks — A.P. (DIR Series) Circular No. 25 and A.P. (DIR Series) Circular No. 26 — “in view of the evolving conditions and to ensure orderly functioning of the foreign exchange market”.

The package has four parts: a ban on rebooking cancelled foreign exchange derivative contracts involving the rupee; a cut in the limit for hedging without proof of underlying exposure from USD 100 million to USD 5 million; a new undertaking that the same exposure has not been hedged with another bank; and a brand-new Foreign Exchange Risk Reserve (FERR) of 20 per cent on certain large contracts. Circular No. 25 came into force with immediate effect; Circular No. 26 applies to contracts undertaken after its issuance.

The same weekend the RBI also opened a special window to meet the daily dollar needs of the public-sector oil marketing companies — we covered that separately in RBI special dollar window for oil marketing companies.

The four measures, one by one

1. No rebooking of cancelled contracts

Under Circular No. 25, an Authorised Dealer (a bank licensed to deal in foreign exchange) shall not permit users to rebook any foreign exchange derivative contract involving the INR, whether deliverable or non-deliverable, which has been cancelled with any Authorised Dealer after the issuance of the Directions. Rollover of contracts on maturity is still permitted, subject to the existing Master Direction. In plain terms: a company can extend a genuine hedge when it matures, but it can no longer cancel a hedge and book a fresh one to take advantage of market moves.

2. USD 100 million becomes USD 5 million

Until now, users could take positions up to USD 100 million equivalent of notional value (outstanding at any time, across all Authorised Dealers) to hedge contracted exposures without having to establish the existence of the underlying exposure. A similar single limit of USD 100 million applied to positions in exchange-traded currency derivatives involving the rupee, across all recognised stock exchanges together. Both thresholds are now USD 5 million. Anyone hedging more than that must show the trade, loan or other exposure that the hedge is meant to protect.

3. An undertaking against double hedging

When a bank offers a rupee derivative contract to hedge a contracted exposure, it must now obtain and retain an undertaking from the user that the same underlying exposure has not been hedged with any other Authorised Dealer. Where an exposure is hedged in parts with several banks, the amounts already booked elsewhere must be stated. Banks must keep the supporting documents for not less than two years.

4. The Foreign Exchange Risk Reserve (FERR)

Circular No. 26 creates the FERR. It applies to rupee derivative contracts with a notional value exceeding USD 2 million, undertaken to hedge current account transactions where the user is buying foreign currency against the rupee (for instance, an importer locking in the price of dollars for a future payment). For each such contract, the bank must keep with the RBI a reserve in cash equal to 20 per cent of the rupee equivalent of the notional amount, maintained daily until the contract ends, and report it daily through the RBI’s Centralised Information Management System (CIMS). Splitting a deal into smaller pieces across banks to escape the threshold is expressly treated as a violation.

Understanding the jargon

Foreign exchange derivative: a contract whose value depends on an exchange rate. The common ones are forwards (fix today the rate for a future exchange), options (the right, but not the obligation, to exchange at a fixed rate), swaps and exchange-traded currency futures.

Deliverable vs non-deliverable: in a deliverable contract the currencies actually change hands at maturity; in a non-deliverable contract only the difference between the agreed rate and the market rate is settled in cash. The RBI’s rebooking ban covers both.

Hedging vs speculation: a hedger already has an exposure — an import bill, an export receivable, a foreign loan — and uses a derivative to protect against an adverse currency move. A speculator has no such exposure and takes a position simply to profit from the move. The “underlying exposure” requirement is the legal line between the two; lowering the no-proof limit from USD 100 million to USD 5 million pushes far more transactions onto the documented, hedging side of that line.

Analysis: what the RBI is trying to do

The RBI’s stated purpose is to “strengthen market discipline and ensure appropriate risk management in the foreign exchange market, while maintaining an orderly and transparent market environment”. Read together, the measures follow a single logic: make every rupee derivative trace back to a real, documented, single exposure.

The no-proof limit is the gate; the undertaking stops one exposure from being hedged several times over; the rebooking ban stops hedges from being turned into trading positions; and the FERR attaches a cost to large hedges by those buying foreign currency, since 20 per cent of the rupee value has to sit with the RBI in cash for the life of the contract. The FERR is targeted narrowly — it applies to current account hedges where the user is a buyer of foreign currency, above USD 2 million — which is the side of the market that adds demand for dollars.

There are trade-offs. Smaller exporters and importers who relied on the USD 100 million no-documentation facility will now face more paperwork, and banks bear new compliance and reserve costs that may be passed on. A rule-based tightening of this kind is a regulatory tool distinct from the RBI’s other options, such as selling dollars from reserves or changing interest rates; it acts on the structure of the market rather than on the price directly.