The Reserve Bank of India (RBI) has clarified the scope of its new Foreign Exchange Risk Reserve (FERR) requirement, specifying which currency derivative contracts attract the 20% reserve, how banks must calculate it and which transactions are exempt.
The clarification, issued through frequently asked questions (FAQs) on 15 October 2026, follows two RBI directions dated 10 and 12 October. The rules cover specified foreign exchange derivatives undertaken by authorised dealer banks with users, as well as certain derivatives banks enter into to hedge currency risks on their own assets and liabilities.
Which forex contracts attract the 20% reserve?
Under the RBI FAQs, foreign exchange derivative contracts undertaken by authorised dealers with users attract FERR only when all the following conditions are met:
- The contract involves the Indian rupee.
- It is undertaken by an authorised dealer with a user.
- The user is purchasing foreign currency against the rupee.
- The notional value exceeds the equivalent of $2 million.
- The contract is for hedging a current account transaction.
A contract with a notional value of $2 million or less is not subject to the requirement. However, the RBI has directed authorised dealers to guard against attempts to structure transactions to avoid the threshold.
The rule does not apply to derivatives in which users sell foreign currency against the rupee, contracts that do not involve the rupee or derivatives users enter into to hedge capital account transactions.
How much reserve must banks maintain?
The FERR must equal 20% of the rupee equivalent to the notional amount of each eligible derivative contract.
The RBI’s FAQs provide the following example.
The bank must therefore maintain ₹19 crore as FERR against this contract.
The reserve must be deposited in the authorised dealer’s current account with the RBI and maintained daily, on a gross basis for each qualifying transaction. It must be maintained from the working day immediately after the contract is entered into until a day after the contract terminates.
The FERR does not earn . It is also separate from the bank’s cash reserve ratio (CRR) obligations. The daily minimum balance in the bank’s RBI current account must cover its CRR requirement, FERR and any other applicable cash reserve obligations. FERR balances cannot be counted towards high-quality liquid assets under the liquidity coverage ratio framework.
Which transactions are exempt?
The RBI has clarified that certain transactions remain outside the FERR requirement, even if they relate to current account payments.
These include derivatives undertaken by users to hedge interest payments on external commercial borrowings (ECBs), coupons on resident debt instruments held by non-residents and dividends payable to non-resident investors.
Although these payments are classified as current account transactions under the Foreign Exchange Management Act, they arise from underlying capital account transactions. The RBI has therefore excluded users’ hedges of these payments from FERR.
However, the exemption does not extend to authorised dealers hedging their own currency risks on these exposures. Banks’ qualifying hedges of their own assets and liabilities are covered by the separate direction issued on 12 October, provided they involve purchasing foreign currency against the rupee.
The RBI has also clarified that FERR does not apply to authorised dealers’ market-making or proprietary positions under that direction. It applies to their qualifying hedges of their own currency risks.
What happens if a contract is cancelled or rolled over?
The FAQs clarify how banks should treat contracts whose value changes after they are entered into.
- Partial cancellation: If part of a contract is cancelled but the remaining notional value still qualifies for FERR, the reserve must be maintained on a pro-rata basis against the remaining value from the following day.
- Value falls below $2 million: If a partial cancellation reduces the remaining notional value below the threshold, the FERR requirement ceases from the following day.
- Rollover of an existing contract: Contracts entered into before the directions were issued are not covered retrospectively. However, if an existing contract is rolled over after the applicable direction, the rolled-over contract is treated as a fresh contract and attracts FERR if it meets the eligibility conditions.
- Options and combinations of options: For a structure involving two or more options undertaken together, the structure is treated as a single derivative contract. The notional amount of the option with the highest notional value is used to determine whether the $2 million threshold is crossed and to calculate FERR.
What should importers and borrowers watch?
Businesses that hedge foreign currency payments should check whether their contracts meet the eligibility conditions, particularly the $2 million threshold and the requirement that the user be purchasing foreign currency against the rupee to hedge a current account transaction.
They should also ask their banks how the reserve requirement affects the pricing and availability of hedging products. The RBI’s FAQs establish the reserve obligation for banks, but they do not quantify any resulting change in customer costs.
Borrowers with overseas loans should pay particular attention to the distinction between hedging payments arising from capital account transactions and banks hedging their own exposures on those transactions. The two may receive different treatment under the RBI’s directions.
The RBI has also prescribed daily reporting by authorised dealers through its Centralised Information Management System. Banks must submit the report for a particular day by 5 pm on the following working day, covering both qualifying contracts with users and their own eligible hedging contracts.