RBI has directed Authorised Dealers (banks) to maintain a Foreign Exchange Risk Reserve (FERR) of 20% of the INR notional value on forex derivative contracts above USD 2 million equivalent, where a user buys foreign currency against INR to hedge current account transactions. It applies to contracts undertaken after the issue of the circular dated October 10, 2026.
- Authorised Dealers must maintain FERR equal to 20% of the INR equivalent of the notional amount of each covered contract.
- Covers INR forex derivative contracts with users above USD two million equivalent, where the user purchases foreign currency against INR to hedge current account transactions.
- Reserve is held in cash in India with RBI, daily, until the contract terminates.
- Splitting deals across contracts or Authorised Dealers to avoid the threshold is a violation.
- Applies only to contracts undertaken after the circular's issuance.
What has changed
RBI's A.P. (DIR Series) Circular No. 26 dated October 10, 2026 amends the framework under the Master Direction on Risk Management and Inter-Bank Dealings (July 05, 2016). It requires Authorised Dealers (AD banks authorised to deal in foreign exchange) to maintain a Foreign Exchange Risk Reserve (FERR) against certain derivative contracts they enter into with customers ("users"). RBI states the purpose is "ensuring the orderly functioning of the foreign exchange market".
Which contracts are covered
- Foreign exchange derivative contracts involving INR, undertaken with users.
- Notional value exceeding USD two million equivalent.
- Undertaken to hedge current account transactions (for example, import payments, services and other current account payments) where the user is purchasing foreign currency against INR.
The reserve
The reserve is 20 per cent of the INR equivalent of the notional amount of each contract. The AD must deposit it in cash in India with the Reserve Bank on a daily basis and keep it until the contract terminates. ADs must report the FERR maintained daily through RBI's Centralised Information Management System (CIMS).
Anti-avoidance
Any attempt by users to get around the USD two million threshold by entering multiple transactions with one or more ADs is a violation of these Directions.
From when
The Directions apply to contracts undertaken after the circular was issued. Existing contracts are not covered by the wording.
What it means in practice
- Importers and other businesses hedging large foreign currency payments through forwards or options may find banks pricing in the cost of locking up 20% cash, so hedging may become costlier or terms may change. The circular itself does not say whether or how ADs may pass on the cost; check with your bank.
- Finance teams should review planned hedges above USD 2 million equivalent and avoid splitting contracts to stay under the limit, as this is treated as a violation.
- Treasury and CFO teams should discuss with their ADs how the new requirement affects pricing, documentation and timing of hedges.
The circular is issued under Sections 10(4) and 11(1) of FEMA, 1999 and Section 45W of the RBI Act, 1934.
Authorised Dealers shall be required to maintain a Foreign Exchange Risk Reserve (FERR) for foreign exchange derivative contracts involving INR undertaken with users;
The Reserve shall be applicable to all foreign exchange derivative contracts involving INR of notional value exceeding USD two million equivalent undertaken for the purpose of hedging current account transactions where the user is purchasing foreign currency against INR;
This Reserve shall be equal to 20 per cent of the INR equivalent of the notional amount of each derivative contract; and
This Reserve shall be deposited and maintained by way of cash in India with the Reserve Bank on a daily basis and shall be maintained until the termination of the contract.
3. Any attempt by users to circumvent the requirements set out in paragraph 2 (ii) ibid through undertaking multiple transactions with one or more Authorised Dealers shall be considered as a violation of these Directions.
4. Authorised Dealers shall report the details of the FERR maintained on a daily basis through Centralised Information Management System (CIMS) of the Reserve Bank.
5. These Directions shall be applicable to foreign exchange derivative contracts undertaken after the issuance of these Directions.
- Authorised Dealer (AD)
- A bank or entity authorised by RBI to deal in foreign exchange
- FERR
- Foreign Exchange Risk Reserve: a cash reserve ADs must keep with RBI against covered derivative contracts
- Notional amount
- The contract's face value on which the derivative is based
- Current account transaction
- Transaction other than capital account, such as trade payments, services, remittances for current needs
- CIMS
- RBI's Centralised Information Management System used for reporting
This update summarises an official document for general information. It is not legal advice; please consult us before acting on it.