India tightens forex derivative rules
The Reserve Bank of India (RBI) has announced measures to tighten the forex derivatives framework, aiming to ensure orderly functioning of the market. The rupee is weakening against the US dollar, and may be aimed at staving off the possibility of the rupee breaching the 97 mark against the US dollar.
As part of these measures, the central bank has restricted Authorised Dealers (ADs) from permitting users to rebook any forex derivative contract involving the Indian Rupee (INR). Such contracts, whether deliverable or non-deliverable, include those cancelled with any AD after the issuance of the Directions.
The RBI has reduced the existing threshold for undertaking forex derivative transactions to hedge contracted exposures without establishing the underlying exposure from $100 million equivalent to $5 million equivalent, across all ADs. They have also reduced the corresponding threshold for taking positions in exchange-traded currency derivatives involving INR from $100 million to $5 million equivalent.
Authorized dealers must now secure an undertaking from clients entering into forex derivative contracts involving INR, ensuring the same exposure hasn’t been hedged elsewhere. In respect of all fx derivative contracts involving INR that are for notional value exceeding $2 million equivalent, AD is required to maintain with the Reserve Bank an Foreign Exchange Risk Reserve (FERR) in cash, equal to 20 per cent of the INR equivalent of the notional amount of each transaction.
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V Rama Chandra Reddy, Head – Treasury, Karur Vysya Bank, said introducing a 20 per cent cash Foreign Exchange Risk Reserve (FERR) on specified transactions exceeding $2 million will Impose an additional liquidity cost on covered transactions and discourage excessive positions. He opined that the central objective appears to be curbing excessive speculative positions, preventing duplicate hedging of the same exposure and ensuring that foreign exchange derivatives are used primarily for genuine risk management.
Reddy noted that while banks may face higher compliance and liquidity costs, customers undertaking genuine hedging may experience additional documentation and some repricing. The measures could moderate speculative activity and promote orderly market conditions. It would therefore be more credible to say the measures may help moderate excessive positioning rather than claim that they will necessarily strengthen the currency. The rupee will continue to be influenced by global factors and underlying dollar demand and supply,” Reddy said.
Meanwhile, on the basis of assessment of current market conditions, RBI has decided to open a special window to meet the entire daily dollar requirements of three public sector oil marketing companies (OMCs) — Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation. Under the facility, the central bank will undertake sale of USD to the public sector OMCs through designated bank/s. The facility will come in effect from October 12, 2026 and will remain in place until further notice.
The RBI’s measures are seen as an effort to stabilize the rupee and prevent excessive speculation in the forex market.
