RBI Introduces 20% Foreign Exchange Risk Reserve for Certain Forex Contracts, Understand New Rule!
| ➡️ Click here to Join Whatsapp News Group - Get instant updates of all Banking News |
The Reserve Bank of India (RBI) has introduced a Foreign Exchange Risk Reserve (FERR) requirement for certain forex derivative contracts involving the Indian rupee. The new requirement applies to contracts entered into after the directions were issued on 10 October 2026.
1. Maintenance of Foreign Exchange Risk Reserve (FERR)
RBI new rule: Authorised dealers must maintain a Foreign Exchange Risk Reserve (FERR) for foreign exchange derivative contracts involving the Indian rupee entered into with users.
What this means: Banks and other authorised dealers must maintain a reserve with the RBI for forex derivative contracts covered by the new rules. A forex derivative is a contract used to manage the risk of changes in currency exchange rates.
For example, an Indian company may enter into a contract with a bank to protect itself against changes in the US dollar-rupee exchange rate when paying a foreign supplier. If the contract meets the conditions specified by the RBI, the reserve requirement will apply.
2. Applicability of the Reserve
RBI new rule: The reserve requirement applies to forex derivative contracts involving the Indian rupee with a notional value exceeding the equivalent of US$2 million. These contracts must be used to hedge current account transactions in which the user is purchasing foreign currency against Indian rupees.
What this means: The rule does not apply to every forex derivative contract. It covers contracts that meet the specified value and transaction conditions.
For example, an Indian importer who needs US dollars to pay for imported goods may enter into a forex derivative contract to protect against currency fluctuations. If the contract’s notional value exceeds US$2 million and the other conditions are met, the FERR requirement will apply.
The term notional value refers to the underlying amount on which the contract is based. It is not necessarily the profit, loss or fee associated with the contract.
3. Amount of the Reserve
RBI new rule: The Foreign Exchange Risk Reserve must equal 20% of the rupee equivalent of the notional amount of each eligible derivative contract.
What this means: The bank must calculate 20% of the contract’s value in Indian rupees and maintain that amount as the reserve.
For example, suppose an eligible forex derivative contract is worth US$3 million and the exchange rate is ₹90 per dollar.
- Contract value: US$3 million × ₹90 = ₹27 crore
- FERR requirement: 20% of ₹27 crore = ₹5.4 crore
Therefore, the authorised dealer must maintain a reserve of ₹5.4 crore with the RBI for this contract.
4. Deposit and Maintenance of the Reserve
RBI new rule: The reserve must be deposited and maintained in cash in India with the RBI daily until the contract ends.
What this means: The authorised dealer must maintain the required reserve throughout the contract period. It is not a one-time requirement that ends immediately after the initial deposit.
For example, if a covered contract remains active for three months, the bank must maintain the required reserve on a daily basis until the contract terminates.
The reserve is maintained by the authorised dealer with the RBI. It is not an additional payment to the foreign supplier.
5. Restriction on Splitting Transactions
RBI new rule: Users cannot avoid the reserve requirement by splitting transactions into multiple smaller transactions with one or more authorised dealers. Attempts to bypass the requirement will be treated as a violation of the RBI’s directions.
What this means: Customers cannot deliberately divide a large transaction into smaller contracts simply to avoid the US$2 million threshold.
For example, suppose a customer needs to hedge a US$3 million transaction. The customer cannot avoid the rule merely by booking three separate contracts of US$1 million each through one or more banks if the transactions are structured to circumvent the requirement.
The RBI has specifically stated that such attempts will be treated as a violation.
6. Daily Reporting Requirements
RBI new rule: Authorised dealers must report details of the FERR maintained by them daily through the RBI’s Centralised Information Management System (CIMS).
What this means: Banks must regularly report the reserve details to the RBI through its designated reporting system. This allows the RBI to monitor compliance with the new requirement.
For example, a bank maintaining reserves against several eligible forex derivative contracts must report the relevant FERR details daily through CIMS.
