Reserve Bank of India (RBI) clarifies scope of 20% Foreign Exchange Risk Reserve requirement on rupee-linked derivative contracts

Key facts

• The Reserve Bank of India (RBI) issued FAQs clarifying that the 20% Foreign Exchange Risk Reserve (FERR) requirement applies to rupee-linked derivative contracts where users buy foreign currency against the rupee, notional value exceeds $2 million equivalent, and the transaction hedges current account exposures.
• Contracts with notional value of $2 million equivalent or less are exempt from the FERR requirement, and dealers must guard against structuring transactions to circumvent the threshold.
• Transactions where users sell foreign currency against the rupee, contracts not involving the rupee, and derivatives hedging capital account transactions are outside the FERR scope.
• The reserve equals 20% of the rupee equivalent of the notional value; for a $10 million contract at Rs 95 per dollar, the FERR would be Rs 19 crore.
• The reserve must be maintained daily in the authorised dealer's current account with the RBI, does not earn interest, and does not qualify as high-quality liquid assets (HQLA) under the liquidity coverage ratio framework.
• Interest payments on external commercial borrowings, coupons on resident debt instruments held by non-residents, and dividends payable to non-resident investors are exempt from the requirement for users.
• The rules apply only to contracts entered after the directions issued on October 10 and October 12; rolled-over pre-existing contracts are treated as fresh contracts and attract the requirement.
• Authorised dealers must report FERR details daily through the RBI's Centralised Information Management System (CIMS) by 5 pm on the following working day.
• The FERR requirement does not apply to foreign currency derivative contracts involving the rupee undertaken by authorised dealers with the RBI.