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The Reserve Bank of India (RBI) has tightened rules for foreign exchange derivative contracts involving the Indian rupee to improve risk management and control positions taken in the currency market. The RBI said that authorised dealers, including banks authorised to deal in foreign exchange, must follow the revised rules with immediate effect.
A forex derivative is a financial contract whose value depends on the exchange rate between two currencies, such as the Indian rupee and the US dollar. It is mainly used by businesses, banks and investors to protect themselves against changes in currency exchange rates or to take positions based on expected currency movements.
For example, suppose an Indian company needs to pay a US supplier $1 million after three months. The current exchange rate is ₹90 per dollar, which means the company would need ₹9 crore to make the payment today. However, if the rupee weakens to ₹95 per dollar after three months, the company would need ₹9.5 crore to pay the same amount, increasing its cost by ₹50 lakh. To avoid this uncertainty, the company can enter into a forex derivative contract, such as a forward contract, with a bank to lock in an exchange rate of ₹90 per dollar for the future payment. This would help the company manage its currency risk and plan its expenses more accurately.
1. No Rebooking of Cancelled Forex Contracts
Users cannot book a cancelled forex derivative contract again if it involves the Indian rupee and was cancelled after the new directions were issued. This rule applies to both deliverable and non-deliverable contracts. However, users can still extend or renew a forex contract when it reaches its maturity date, subject to RBI rules.
2. Forex Position Limit Reduced from $100 Million to $5 Million
The RBI has reduced the limit for taking certain forex positions without providing proof of the actual foreign exchange requirement from $100 million to $5 million. For contracts used to protect against currency risk on a confirmed transaction, the limit without having to prove the underlying exposure is now $5 million across all authorised dealers. For positions taken without an underlying foreign exchange requirement, the combined limit is also reduced to $5 million across all rupee-related currency pairs and recognised stock exchanges. The limits apply to the total value of positions outstanding at any point in time.
3. Banks Must Collect an Additional Declaration
Banks must obtain a written declaration from customers confirming that they have not used the same transaction to hedge currency risk through another authorised dealer. If a customer divides the same transaction between multiple banks for hedging, the declaration must clearly mention the amount already booked with other banks. Banks can also obtain this declaration as part of the contract confirmation. This is an additional requirement, and customers may still need to submit other documents required by the RBI.
4. Banks Must Keep Documents for at Least Two Years
Banks and other authorised dealers are responsible for ensuring that the new rules are followed. They must verify the actual foreign exchange requirement and collect the necessary documents. The documents must be retained for at least two years.
5. New Rules Effective Immediately
The directions were issued under the Foreign Exchange Management Act (FEMA), 1999, and the Reserve Bank of India Act, 1934. The new rules came into force with immediate effect from 10 October 2026.
