Understand Authorised Dealer RBI Circular with help of Quiz

Correct answer: Master Direction – Risk Management and Inter-Bank Dealings dated July 5, 2016, as amended from time to time. The October 2026 directions update this existing framework. When studying RBI circulars, distinguish the underlying Master Direction from the individual circulars that amend or clarify it.

Correct answer: Only for hedging. The revised direction restricts INR-involving non-deliverable derivative contracts (NDDCs) offered to non-resident users to hedging purposes. This is a change from the earlier provision, which had allowed the specified eligible dealers to offer these contracts without a purpose restriction. Do not confuse this purpose restriction with the separate FERR calculation rules.

Correct answer: Non-deliverable derivative contract. A non-deliverable derivative is generally settled financially rather than through physical delivery of the underlying currency. In this regulatory context, the directions specifically address contracts involving the Indian rupee (INR).

Correct answer: Foreign Exchange Risk Reserve. FERR is a cash reserve that Authorised Dealers must maintain with the Reserve Bank of India for specified INR-involving foreign exchange derivative contracts. The October 2026 RBI FAQs clarify the contracts covered, the threshold for user transactions, exemptions, calculation and reporting.

Correct answer: An INR-involving derivative where the user purchases foreign currency against INR to hedge a current account transaction and the notional value exceeds USD 2 million equivalent. All these conditions matter: INR must be involved, the user must be purchasing foreign currency against INR, the purpose must be hedging a current account transaction, and the notional amount must exceed the threshold. A contract of exactly USD 2 million equivalent or less does not meet the threshold.

Correct answer: When the notional value exceeds USD 2 million equivalent. A contract with a notional value of USD 2 million equivalent or less is not subject to the user-side FERR requirement. The RBI also cautions Authorised Dealers against structuring transactions to avoid the threshold. This threshold is for contracts undertaken with users; do not automatically apply it to the separate rule for an Authorised Dealer hedging its own assets and liabilities.

Correct answer: Hedging current account transactions. The October 2026 FAQ limits the user-side FERR requirement to qualifying INR-involving derivative contracts used to hedge current account transactions, subject to the other conditions such as purchasing foreign currency against INR and exceeding USD 2 million equivalent. Capital-account hedges are excluded from this user-side requirement.

Correct answer: No. The RBI FAQ states that the user-side FERR requirement applies only where the user purchases foreign currency against INR. A contract where the user sells foreign currency against INR is outside this specific requirement. This should not be confused with the separate rule for an Authorised Dealer hedging its own assets and liabilities.

Correct answer: A hedge for interest on an External Commercial Borrowing (ECB), coupons on resident debt instruments held by non-residents, or dividends payable to non-resident investors. The FAQ explains that these outflows arise from underlying capital-account transactions, so user-side derivative contracts used to hedge them are excluded from FERR. The FAQ separately clarifies that an Authorised Dealer‘s own hedge of its currency risk on such exposures may still attract FERR if the conditions for the bank‘s own positions are met.

Correct answer: No. The RBI FAQ says FERR applies only to foreign exchange derivative contracts involving INR. A derivative that does not involve INR is outside this specific reserve requirement, even though other rules may apply to it.

Correct answer: 20% of the INR equivalent of the notional amount of each applicable derivative contract. Formula: FERR = INR-equivalent notional amount × 20%. The requirement is calculated contract by contract on a gross basis, rather than by simply netting all eligible contracts against each other.

Correct answer: ₹19 crore. First calculate the INR-equivalent notional amount: USD 10 million × ₹95 = ₹950 million, which equals ₹95 crore. Then calculate 20% of ₹95 crore: ₹95 crore × 0.20 = ₹19 crore. This is the same illustrative calculation used in the RBI FAQ.

Correct answer: The notional amount of the single option with the highest notional value. Where two or more options are undertaken together in a single structure, the RBI FAQ treats the structure as one derivative contract and uses the largest individual option‘s notional amount for the threshold and FERR calculation. The amounts of all options are not simply added together for this test.

Correct answer: As cash in the Authorised Dealer‘s current account with the RBI, maintained daily. The October 2026 FAQ states that FERR is maintained in the dealer‘s current account with the Reserve Bank, on a daily basis, and on a gross basis for each applicable derivative transaction. The balance must also cover the dealer‘s separate CRR and other cash-reserve obligations; FERR does not replace those obligations.

Correct answer: No. The RBI FAQ expressly states that FERR maintained with the Reserve Bank does not earn interest. Therefore, the dealer must account for the reserve as a required cash balance that does not generate interest income.

Correct answer: Until a day after termination of the derivative contract. The FAQ is more precise than simply saying ‘until termination‘: it states that the FERR applicable to a contract is required to be maintained until a day after termination. This timing detail is important for questions based on the October 2026 clarification.

Correct answer: From the next day, FERR is maintained on a pro-rata basis on the notional amount that remains. The reserve is adjusted to the still-valid notional amount, rather than continuing to be calculated on the original full notional amount. If the remaining notional falls below the USD 2 million equivalent threshold for a user-side contract, the FAQ says the FERR requirement ceases from the following day.

Correct answer: No. The October 12 clarification states that FERR applies to the Authorised Dealer‘s own INR-involving derivative contracts when undertaken to hedge the currency risk of its own assets and liabilities and the dealer is purchasing foreign currency against INR. Market-making transactions and proprietary positions are excluded from this own-position FERR requirement.

Correct answer: By 5 PM on the following working day (T+1 basis). Authorised Dealers must report FERR details daily through CIMS. The report for a particular day includes contracts undertaken that day and outstanding contracts with their current notional amounts against which FERR is maintained. The reporting requirement covers both user contracts and the dealer‘s own qualifying hedges.

Correct answer: No. The RBI FAQ states that FERR balances maintained with the Reserve Bank are not eligible to be counted as HQLA under the LCR framework. The FAQ also clarifies that FERR does not earn interest and that derivative contracts involving INR undertaken by Authorised Dealers with the RBI are exempt from the FERR requirement.