The Reserve Bank of India (RBI) has widened its foreign-exchange risk reserve requirement to include eligible rupee derivative contracts that authorized banks use to hedge their own currency risks. Under directions issued on October 12, 2026, banks must maintain a cash reserve equivalent to 20% of the rupee value of covered derivative contracts in which they purchase foreign currency against the rupee. The move expands a requirement introduced earlier for certain customer transactions and forms part of a broader effort to reduce pressure on the Indian currency.
The central bank has also tightened rules governing non-deliverable rupee derivatives offered to non-resident clients, restricting their use to hedging rather than allowing transactions for any purpose. The measures come as the rupee faces pressure from elevated oil prices, foreign capital outflows and strong demand for dollars. Although the new rules are intended to discourage excessive currency positioning, they have raised concerns among market participants about higher hedging costs, liquidity constraints and uncertainty over how some transactions should be treated.
Key Takeaways
- 20% cash reserve: Authorized dealers must maintain a foreign-exchange risk reserve equal to 20% of the rupee value of each eligible derivative contract covered by the new directions.
- Expanded scope: The requirement now includes eligible contracts banks use to hedge currency risks on their own assets and liabilities.
- Offshore derivative restrictions: Non-deliverable rupee derivatives offered to non-resident users by covered institutions can now be used only for hedging.
- Higher hedging costs: Banks may pass some of the funding cost of maintaining the reserve on to importers and other customers.
- Rupee support: The measures are intended to moderate dollar demand and discourage excessive speculative activity.
- Implementation uncertainty: Reuters reported on October 13 that the RBI did not intend the reserve requirement to cover interbank transactions, despite confusion among market participants.
What Has the RBI Changed?
The RBI’s latest action expands the scope of its foreign-exchange risk reserve framework. The requirement was initially introduced for certain rupee-linked foreign-exchange derivatives undertaken with customers to hedge current-account transactions, subject to a transaction threshold.
The October 12 directions extend the reserve requirement to eligible derivative contracts that authorized dealers undertake to hedge currency risks on their own assets and liabilities. Unlike the existing customer-related rule, which applies to qualifying transactions above the specified threshold, the new directions for banks’ own hedging contracts do not prescribe a minimum transaction threshold.
The reserve is calculated as 20% of the rupee equivalent of the notional value of each eligible contract. The notional value is the reference amount used to calculate a derivative’s payments; it is not necessarily the amount of money exchanged when the contract is settled.
| Policy area | Earlier framework | Latest change |
|---|---|---|
| Customer hedging contracts | Reserve requirement applied to qualifying current-account hedges above the specified threshold | Existing requirement continues under its applicable conditions |
| Banks’ own currency hedges | Not covered by the same reserve requirement | Eligible rupee derivative contracts are brought within the reserve framework |
| Reserve calculation | 20% for covered customer contracts | 20% of the rupee equivalent of each eligible bank hedging contract |
| Non-deliverable rupee derivatives for non-residents | Covered institutions could offer contracts without restricting their purpose to hedging | Such contracts are restricted to hedging purposes |
| Policy objective | Manage foreign-exchange risk and orderly market functioning | Broader effort to limit speculative pressure and moderate dollar demand |
Source: RBI directions dated October 10 and October 12, 2026, and reporting by Business Standard and Reuters.
The changes should not be interpreted as a blanket 20% increase in the cost of every foreign-exchange transaction. The reserve is a cash requirement linked to eligible derivative contracts. The actual cost to a bank or customer depends on funding costs, the duration of the contract and how the expense is allocated.
Why Is the RBI Trying to Curb Speculation?
The rupee has faced pressure from several factors, including expensive crude oil, foreign investment outflows and strong demand for dollars from companies seeking protection against further currency depreciation.
India imports substantial quantities of crude oil. When international oil prices rise, importers generally need more dollars to pay overseas suppliers, all else being equal. This can increase demand for foreign currency in the domestic market.
At the same time, companies may seek forward contracts to lock in exchange rates for future payments. These contracts help businesses manage uncertainty, but a sharp increase in one-way demand for dollar protection can add pressure to the market.
The RBI’s concern is not simply that companies are hedging. Hedging is a legitimate financial activity that helps businesses manage currency risk. The policy objective is to discourage excessive positions and repeated transactions that can intensify pressure on the rupee.
The distinction between hedging and speculation is important. An importer expecting to pay a supplier in dollars may use a forward contract to reduce the risk of a weaker rupee. A trader taking a currency position without a corresponding underlying exposure may instead be seeking to profit from exchange-rate movements.
In practice, the boundary can depend on the structure and purpose of a transaction. The RBI’s measures increase the cost of certain covered contracts and tighten the purposes for which specific derivative products can be offered.
How the 20% Foreign-Exchange Risk Reserve Works
A foreign-exchange derivative allows a business or financial institution to manage the risk of currency movements. For example, an Indian importer expecting to pay a dollar-denominated invoice in three months may enter into a contract to buy dollars at an agreed exchange rate.
If the rupee weakens before the payment date, the hedge can protect the importer against some of the increase in the rupee cost of buying dollars. If the rupee strengthens, the importer may not benefit fully from the more favourable market rate, depending on the contract.
Under the reserve requirement, a covered transaction also creates a cash-funding obligation for the authorized dealer.
Consider an illustrative eligible derivative contract with a notional value equivalent to ₹100 crore. A 20% reserve would equal ₹20 crore.
| Illustrative calculation | Amount |
|---|---|
| Notional value of eligible contract | ₹100 crore |
| Applicable reserve percentage | 20% |
| Required reserve | ₹20 crore |
This example explains the calculation; it is not a statement about the average size of actual contracts.
The reserve ties up funds that a bank could otherwise use for other purposes. The bank therefore faces a funding cost, even though the requirement does not mean that the entire reserve amount is an expense or a permanent loss.
Depending on the transaction and commercial arrangement, a bank may absorb some of the cost or pass some of it to a customer through pricing. The resulting impact on a customer’s hedge will vary by bank, contract tenor and funding conditions.
What the Rules Mean for Importers and Exporters
The RBI’s measures could affect companies differently depending on whether they need to buy or sell foreign currency and how much protection they require.
Importers may face more expensive hedges
Importers often need dollars to pay for crude oil, electronics, machinery, chemicals and other goods purchased overseas. A forward contract can help them estimate the rupee cost of those payments in advance.
If banks face additional funding costs for eligible contracts, they may incorporate those costs into the exchange rates offered to customers. Some market participants have estimated that the new framework could increase hedging costs materially, with the effect varying according to the transaction and how much of the cost banks pass on.
Higher costs could encourage some importers to shorten the duration of their hedges, reduce the amount covered or delay transactions. These responses may reduce the immediate demand for forward dollars, but they could also leave businesses more exposed to currency fluctuations.
Exporters have different exposure
Exporters receiving dollar payments may sell those dollars for rupees or use derivatives to lock in the value of future receipts. Their currency exposure is therefore different from that of importers purchasing dollars.
The RBI’s reserve framework is not a universal restriction on every currency transaction. Its application depends on the contract, the direction of the currency trade and the relevant regulatory conditions.
The commercial impact will also depend on the services offered by individual banks and how they adjust their pricing and compliance procedures.
Small businesses may have fewer options
Larger companies often have treasury teams that can compare pricing, manage documentation and work with several banks. Smaller importers may have fewer resources to evaluate alternative hedging strategies.
If banks become more selective about providing forward contracts or require additional documentation, smaller firms could find it harder to obtain the products they need. That would be an unintended cost to monitor as the rules take effect.
RBI Tightens Rules for Non-Deliverable Rupee Derivatives
The central bank has separately restricted the purposes for which certain institutions can offer non-deliverable rupee derivatives to non-resident users.
A non-deliverable derivative, commonly used in the offshore foreign-exchange market, allows parties to settle the profit or loss on an exchange-rate contract in cash rather than physically exchanging the underlying currencies. These contracts are often used by investors and companies that want exposure to a currency or need to hedge future payments.
Under the revised directions, authorized dealer banks with operating International Financial Services Centre banking units, along with certain authorized primary dealers, can offer non-deliverable derivatives involving the rupee to non-resident users only for hedging purposes.
The change narrows the permitted use of these instruments. It is intended to make it harder to use the covered contracts for purely speculative positioning against the rupee.
The distinction matters because the offshore and onshore rupee markets can influence each other. Exchange-rate expectations and positions in one market may affect pricing and demand in another, although the relationship depends on market conditions and the ability of participants to move between markets.
Restricting permitted purposes may reduce some speculative activity, but the overall effect will depend on compliance, enforcement and whether demand shifts to other instruments or markets.
Confusion Over Interbank Transactions
The implementation of the new rules has created uncertainty among some banks, particularly about whether the cash reserve requirement also applies to transactions between financial institutions.
Reuters reported on October 13 that seven bankers said they had been reluctant to quote certain dollar-rupee forward contracts because they interpreted the directions as potentially covering interbank transactions. A source familiar with the RBI’s thinking told Reuters that the requirement was not intended to cover interbank transactions.
The distinction is important because banks routinely trade with one another to manage liquidity and offset currency positions arising from customer business. If market participants interpret a rule too broadly, they may temporarily reduce quotations or become more cautious while seeking clarification.
Such uncertainty can affect market functioning even before a policy has a measurable impact on the exchange rate. Reduced willingness to quote prices may make it harder for some participants to execute transactions at their preferred time or price.
As of October 13, Reuters reported that the RBI had not immediately responded to requests for comment on the interpretation. The reported clarification from a source familiar with the central bank’s thinking should therefore be distinguished from a separately published formal amendment.
Banks and corporate treasury teams will need to follow the applicable RBI directions and any subsequent official clarification rather than rely solely on market interpretations.
Will the Measures Strengthen the Rupee?
The measures are designed to moderate pressure on the rupee, but their effectiveness depends on more than the cost of derivative contracts.
By increasing the funding burden associated with eligible hedges, the RBI can make some forms of dollar protection more expensive. Restrictions on non-deliverable derivatives may also reduce opportunities for covered non-resident users to take positions that are not linked to underlying hedging needs.
However, the rupee’s direction is influenced by a wide range of factors, including oil prices, trade flows, foreign portfolio investment, global interest rates and demand for dollars from Indian companies.
If crude oil remains expensive, importers may continue to require substantial dollar payments. If foreign investors withdraw capital from Indian markets, that can also affect foreign-exchange demand and supply. In those circumstances, higher hedging costs may moderate some activity without removing the underlying economic pressure.
The RBI has also introduced a special facility to meet the dollar requirements of three state-run oil marketing companies: Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation. By supplying dollars through a separate arrangement, the central bank aims to divert some of their demand away from the regular foreign-exchange market.
That approach can change where dollar demand is met, but it does not eliminate the country’s underlying need to pay for imported oil. Its effects on the rupee will depend on the scale of the facility, the availability of foreign-exchange reserves and other market flows.
The Bigger Picture
The RBI’s expanded reserve requirement reflects a trade-off between limiting excessive currency positioning and preserving efficient access to legitimate hedging. Making certain contracts more expensive may discourage some speculative activity and reduce demand for forward dollars, but it can also increase costs for businesses that use derivatives to manage genuine commercial risks. The effectiveness of the measures will depend on how the rules are implemented and how banks and customers adjust their behaviour.
The measures also demonstrate the central bank’s willingness to use regulatory tools alongside market operations to address pressure on the rupee. Yet no single rule can determine the currency’s trajectory independently of oil prices, capital flows and India’s external financing needs. The coming weeks will show whether the new framework moderates one-way demand without causing prolonged disruption to normal currency trading or leaving businesses less protected against exchange-rate volatility.
Looking Ahead
Banks will be watching for further regulatory clarification, particularly on the treatment of interbank transactions and the operational requirements for maintaining the reserve. Importers and other companies with foreign-currency payments will need to reassess the cost and duration of their hedges, while financial institutions adjust pricing, documentation and compliance processes. The actual effect on hedging activity will become clearer as transaction volumes and market liquidity respond to the new framework.
The longer-term impact on the rupee will depend on whether the measures meaningfully reduce excessive dollar demand and whether external pressures ease. A sustained improvement in oil prices or capital flows could support the currency independently of the new rules, while renewed pressure could limit the policy’s effect. For now, the RBI’s approach signals a stronger effort to manage currency-market behaviour, with the challenge being to curb destabilizing activity while preserving access to legitimate risk management.
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