RBI Tightens Forex Derivative Rules And Cuts Exposure Threshold From US$100 Million To US$5 Million
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RBI has tightened foreign exchange derivative rules and cut the threshold for unhedged exposure-based transactions to US$5 million. It has also introduced a 20% Foreign Exchange Risk Reserve for specified contracts.
The Reserve Bank of India (RBI) has announced new regulations for the foreign exchange market. These include restrictions on rebooking of cancelled derivative contracts, a lower transaction threshold and additional documentation requirements.
Announced on 10 October 2026, the RBI forex rules also introduce for the first time, a Foreign Exchange Risk Reserve (FERR) for specified foreign exchange derivative contracts involving the Indian rupee (INR).
What Changes Apply To Cancelled Currency Derivatives?
Authorised dealers will not be permitted to allow users to rebook foreign exchange derivative contracts involving the INR that were cancelled with any authorised dealer after the directions were issued. Rollover of contracts at maturity will continue to be permitted, subject to existing regulatory requirements.
Why Has The Transaction Threshold Been Cut?
The threshold for undertaking foreign exchange derivative transactions to hedge contracted exposures without establishing the underlying exposure has been reduced from US$100 million equivalent to US$5 million equivalent across all authorised dealers.
The corresponding threshold for taking positions in exchange-traded currency derivatives involving the INR, without establishing an underlying exposure, has also been reduced from US$100 million to US$5 million equivalent across all recognised stock exchanges taken together.
What Is The New Foreign Exchange Risk Reserve?
For INR-involving foreign exchange derivative contracts with a notional value exceeding US$2 million equivalent, authorised dealers must maintain a FERR with the RBI in cash, equal to 20% of the INR equivalent of each transaction’s notional amount.
The reserve applies to contracts used to hedge current account exposures where the user purchases foreign currency against the INR.
What Additional Documentation Will Be Required?
Authorised dealers must obtain and retain an undertaking from users entering into INR-involving foreign exchange derivative contracts to hedge contracted exposures. The undertaking must confirm that the same underlying exposure has not been hedged with another authorised dealer.
This article is for informational purposes only and should not be considered investment advice from Kotak Neo. For compliance T&C and disclaimers, Visit www.kotakneo.com/disclaimer
Vishwa has spent 10+ years across fintech and FMCG doing what most people miss, connecting the dots, catching trends before they trend, and finding the angle nobody else thought to ask about.
At Kotak Neo, she drives content strategy for neoshorts, Kotak News Desk, and Investing Guide, turning market noise into something worth reading.
When she's not decoding markets, she trades charts for canvases, chasing art, painting, and architecture across cities she's yet to explore.
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