What happened
The Reserve Bank of India (RBI) issued a circular on 12 October 2026 that tightens how banks deal in rupee-linked derivatives. It does two things: it limits who can use certain rupee contracts offered to non-residents, and it makes banks set aside cash against some of their own currency hedges.
Hedging-only for non-resident users
A non-deliverable derivative contract (NDDC) is a contract whose value depends on the rupee exchange rate but is settled in cash, without the actual currencies changing hands. Authorised Dealers are banks and other entities licensed to deal in foreign exchange. Until now, two kinds of them could offer NDDCs to non-residents for any purpose at all: Category-I banks that run a banking unit in an International Financial Services Centre (IFSC), and Standalone Primary Dealers holding Category-III authorisation.
After a review, the RBI has decided that Authorised Dealers may now offer NDDCs involving the rupee to a non-resident user only for hedging, meaning protecting against currency moves rather than taking a position on them.
20% Foreign Exchange Risk Reserve
The circular also introduces a Foreign Exchange Risk Reserve (FERR). The key features are:
- It applies to foreign exchange derivative contracts involving the rupee that an Authorised Dealer undertakes to hedge the currency risk of its own assets and liabilities.
- It applies where the dealer is buying foreign currency against rupees.
- It equals 20% of the rupee equivalent of the notional amount of each contract. The notional amount is the face value on which the contract is based, not money that changes hands.
- It must be deposited in cash in India with the RBI on a daily basis and kept until the contract ends.
The directions apply to contracts undertaken after the circular was issued.
What it means for you
If you are an ordinary saver or borrower in India, you will see no direct change in deposit or loan terms. The changes mostly affect banks and the non-resident institutions or businesses that use rupee derivatives.
For non-residents who used NDDCs for purposes other than hedging, the route is now closed at these dealers. Banks buying dollars forward against rupees to cover their own balance sheet will have to lock up cash with the RBI. As an illustration, on a contract with a notional amount of ₹100 crore, the reserve would be ₹20 crore, held until the contract ends. The circular does not say how banks will treat this cost in pricing, so that remains to be seen.
If you are an NRI or travel and transact abroad, you can check conversions with the Currency Converter. The circular does not mention retail remittances or everyday conversions.
Background
The circular amends the Master Direction on Risk Management and Inter-Bank Dealings, first issued on 5 July 2016. The RBI cites its powers under the Foreign Exchange Management Act (FEMA), 1999 (Sections 10(4) and 11(1)) and the Reserve Bank of India Act, 1934 (Section 45W). It adds that any permissions needed under other laws remain separate.
The circular is a short document and does not spell out its reasons. It is signed by Chief General Manager Dimple Bhandia.
What to watch next
Watch for any FAQs or clarifications from the RBI on how the reserve is calculated, and for how banks respond in their pricing of forward contracts.
