RBI Foreign Exchange Risk Reserve: New Hedging Rules
October 17, 2026 · Other News Alerts / Articles
RBI Circular 25 bars rebooking cancelled INR hedges and sets a USD 5 million no-underlying limit; Circulars 26 and 27 add a 20% Foreign Exchange Risk Reserve.
The Reserve Bank of India (RBI) has introduced a Foreign Exchange Risk Reserve (FERR) and tightened INR hedging rules through A.P. (DIR Series) Circular No. 25 and Circular No. 26 dated October 10, 2026 and Circular No. 27 dated October 12, 2026, followed by FAQs on October 15, 2026. As of October 17, 2026, Authorised Dealers must keep a cash Foreign Exchange Risk Reserve with the RBI for specified INR foreign-exchange derivative contracts. Users face a bar on rebooking cancelled contracts and a lower limit for hedging without establishing the underlying exposure.
The changes matter to companies that hedge import payables and other current-account needs, and to banks that book those hedges. Each circular and the FAQs are summarised below.
What has changed in Foreign Exchange Risk Reserve rules
Circular No. 25: rebooking ban and USD 5 million limit
Circular No. 25 (RBI/2026-27/291) amends the Master Direction on Risk Management and Inter-Bank Dealings with immediate effect from October 10, 2026. Authorised Dealers must not permit users to rebook any INR foreign-exchange derivative contract, deliverable or non-deliverable, cancelled with any Authorised Dealer after the issuance of these Directions on October 10, 2026. Rollover on maturity remains permitted.
The limit for hedging a contracted exposure without establishing the underlying exposure is cut from USD 100 million to USD 5 million equivalent notional outstanding across all Authorised Dealers. The matching limit for INR exchange-traded currency derivatives is also USD 5 million.
When offering an INR hedge of a contracted exposure, the Authorised Dealer must obtain and retain an undertaking from the user that the same exposure has not been hedged with any other Authorised Dealer; where it is hedged in parts with more than one Authorised Dealer, the undertaking must state the amounts already booked with the others (para 2(d)). The Authorised Dealer is responsible for compliance, including verifying the underlying exposure, and must keep the supporting documents for at least two years (para 3).
Circular No. 26: FERR on user hedges
Circular No. 26 (RBI/2026-27/292) applies FERR where the contract involves INR, is with a user, the user purchases foreign currency against INR, the notional exceeds USD 2 million equivalent, and the hedge is for current-account transactions. Splitting deals to circumvent the threshold is a violation.
The reserve is 20 per cent of the INR equivalent notional, kept in cash in the Authorised Dealer's current account with the RBI, daily, contract by contract on a gross basis, from the working day after the deal until a day after the contract ends (para 2(iv); FAQs 11 and 14). Authorised Dealers report FERR daily on CIMS by 5 PM on T+1 (para 4; FAQs 19 and 20). The Directions apply to contracts undertaken after the issuance of the Directions on October 10, 2026 (para 5).
Circular No. 27: NDDCs and own-book FERR
Circular No. 27 (RBI/2026-27/293) restricts non-deliverable derivative contracts (NDDCs) involving INR offered to non-resident users to hedging only. Earlier, AD Category-I banks with an operating IFSC Banking Unit and AD Category-III Standalone Primary Dealers could offer such NDDCs without this restriction (para 2).
It also requires FERR of 20 per cent, in cash with the RBI, on INR derivative contracts an Authorised Dealer undertakes to hedge its own assets and liabilities where it purchases foreign currency against INR. This own-book FERR has no USD 2 million threshold and no current-account limit (para 3(ii)). The Directions apply to contracts undertaken after the issuance of the Directions on October 12, 2026 (para 4).
Foreign Exchange Risk Reserve: key dates and rates
Category
Earlier position
Revised position
Effective from
Rebooking cancelled INR derivatives
No specific bar on rebooking cancelled contracts
Rebooking barred, with any Authorised Dealer, of contracts cancelled after the issuance of the Directions; rollover on maturity allowed
October 10, 2026 (Circular No. 25)
Hedging without establishing underlying exposure
USD 100 million equivalent outstanding
USD 5 million equivalent outstanding, plus undertaking
October 10, 2026 (Circular No. 25)
FERR on user hedges
No FERR
20% of INR notional above USD 2 million, current-account hedges where user buys foreign currency
Contracts undertaken after the issuance of the Directions on October 10, 2026 (Circular No. 26)
FERR on Authorised Dealer own-book hedges
No FERR
20% of INR notional, no USD 2 million threshold
Contracts undertaken after the issuance of the Directions on October 12, 2026 (Circular No. 27)
INR NDDCs for non-residents
AD Category-I banks with an operating IFSC Banking Unit and AD Category-III Standalone Primary Dealers could offer them without purpose restriction
Hedging only
Contracts undertaken after the issuance of the Directions on October 12, 2026 (Circular No. 27)
What the RBI FAQs on Foreign Exchange Risk Reserve clarify
The FAQs were released with Press Release 2026-2027/1334 dated October 15, 2026. Circular No. 26 FERR does not apply when the user sells foreign currency against INR, to user hedges of capital-account transactions, or to current-account flows arising from them, such as interest on External Commercial Borrowings, coupons on resident debt instruments held by non-residents and dividends payable to non-resident investors. Own-book hedges of such exposures remain within Circular No. 27.
Market-making and proprietary positions are outside FERR (FAQ 3), as are non-INR contracts (FAQ 7) and contracts with the RBI (FAQ 22). FERR is on top of the Cash Reserve Ratio (FAQ 12), earns no interest and is not High Quality Liquid Assets (FAQs 13 and 21). On part-cancellation, FERR reduces pro rata and stops once notional is at or below USD 2 million (FAQs 15 and 16).
Practical impact of the Foreign Exchange Risk Reserve
For companies
Once a qualifying user hedge exceeds USD 2 million, the bank must fund a 20 per cent cash reserve that earns no interest. In this article's analysis, which is not an RBI statement, Authorised Dealers may therefore price and document such hedges differently from smaller ones.
Users who cancelled and rebooked hedges when rates moved will need to rely on rollover at maturity instead. Hedges without established underlying exposure are capped at USD 5 million outstanding.
For individuals
Resident individuals can be "users". The rules affect them only if they enter into INR foreign-exchange derivative contracts such as forwards or options. Ordinary purchases of foreign currency for remittances are not derivative contracts and are outside these circulars. Individuals who do hedge are subject to the rebooking ban, the USD 5 million limit for hedging without proving the underlying exposure, and the undertaking where a contracted exposure is hedged.
Key takeaways
Circular No. 25 bars rebooking of INR derivatives cancelled after the issuance of the Directions and cuts the no-underlying hedge limit to USD 5 million from October 10, 2026.
Circular No. 26 imposes a 20 per cent cash Foreign Exchange Risk Reserve on qualifying user hedges above USD 2 million.
Circular No. 27 limits INR NDDCs for non-residents to hedging and extends FERR to Authorised Dealer own-book hedges.
FERR applies to contracts undertaken after the issuance of the Directions on October 10, 2026 (Circular 26) / October 12, 2026 (Circular 27); a rollover after those dates is a fresh contract for FERR if the rolled-over contract otherwise meets the conditions.
Frequently asked questions
What is the Foreign Exchange Risk Reserve under Circular No. 26?
It is a reserve of 20 per cent of the INR equivalent notional of each qualifying INR derivative contract with a user. It is kept in cash in the Authorised Dealer's current account with the RBI, daily, contract by contract on a gross basis, from the working day after the deal until a day af