RBI expands 20% forex risk reserve to banks' own hedges and restricts rupee NDFs to hedging only

Key facts

• The Reserve Bank of India (RBI) widened the scope of the 20% cash deposit (Foreign Exchange Risk Reserve) requirement to cover all foreign exchange derivative contracts involving the rupee undertaken by authorised banks, including those hedging the banks' own assets and liabilities.
• The Foreign Exchange Risk Reserve equals 20% of the INR equivalent of the notional amount of each derivative contract, must be deposited in cash with the RBI on a daily basis, and maintained until contract termination.
• The RBI restricted Authorised Dealers, including banks with IFSC Banking Units and Standalone Primary Dealers (Authorised Dealer Category-III), to offering non-deliverable rupee derivative contracts to non-resident users only for hedging purposes, ending the earlier unrestricted use.
• The directions, issued on October 12, 2026 under FEMA, 1999 and the RBI Act, 1934, apply to foreign exchange derivative contracts undertaken after their issuance.
• The measures, announced since Saturday, aim to support the rupee, which has been falling due to high oil prices and capital outflows; the rupee rose about 1% on Monday after the weekend measures, which also included a special dollar window for state-run oil refiners.
• Bankers said the reserve requirements raise the cost of protection against rupee weakness and should slow hedging demand; Chinese authorities have used similar tools to discourage one-way bets against the yuan.