RBI tightens rules on currency hedging: USD 5 million limit without proof of exposure, no rebooking of cancelled contracts, and a new 20% reserve
On 10 and 12 October 2026 the RBI issued A.P. (DIR Series) Circulars 25, 26 and 27. Businesses can now hedge only up to USD 5 million (down from USD 100 million) without proving the underlying exposure, cannot rebook a cancelled INR derivative contract, and must give their bank an undertaking that the exposure is not hedged elsewhere. Banks must also keep a 20% cash reserve with the RBI on large hedges where the customer buys foreign currency.
- Circular 25 in force; Circular 26 applies to contracts after issue10 October 2026
What this means
Hedges above USD 5 million (outstanding, across all banks) now need documents proving the underlying exposure. A cancelled INR derivative cannot be rebooked, though contracts can still be rolled over on maturity. Every new hedge of a contracted exposure needs an undertaking that the same exposure is not hedged with another bank. On importer-side hedges above USD 2 million, the bank must park 20% of the notional with the RBI, interest-free, until the contract ends.
Who is affected
Importers, exporters and other businesses that hedge foreign-currency exposure with INR forwards, options or exchange-traded currency derivatives through Indian banks. The 20% reserve is kept by the bank, not by the customer, and applies only where the customer buys foreign currency against INR, the contract exceeds USD 2 million, and it hedges a current-account transaction.
What you should do
Before booking or cancelling a forward, check your outstanding hedges across all banks against the USD 5 million limit, keep the underlying invoices and contracts ready, and avoid cancelling a contract you may need to rebook. If you import and hedge in large amounts, ask your bank how the 20% reserve will affect its pricing.
What changed
The Reserve Bank of India issued A.P. (DIR Series) Circulars No. 25 and No. 26 on 10 October 2026 and No. 27 on 12 October 2026, amending the Master Direction on Risk Management and Inter-Bank Dealings.
Circular 25, in force with immediate effect, makes three changes for users. A bank may not let a user rebook an INR foreign exchange derivative contract, deliverable or non-deliverable, that has been cancelled with any bank; rollover on maturity is still allowed. The limit for hedging a contracted exposure without establishing the underlying exposure falls from USD 100 million to USD 5 million of notional value outstanding across all banks, and the same USD 5 million limit now applies to exchange-traded INR currency derivatives across all stock exchanges. And the bank must obtain an undertaking from the user that the same exposure has not been hedged with any other bank.
Circular 26 requires banks to keep a Foreign Exchange Risk Reserve (FERR) with the RBI equal to 20 per cent of the INR equivalent of the notional amount, in cash and until the contract ends, on INR derivative contracts with users that exceed USD 2 million, hedge current-account transactions, and involve the user buying foreign currency against INR. It applies to contracts undertaken after the circular was issued, and splitting deals across banks to stay under the limit is treated as a violation.
The RBI's FAQs confirm that the reserve does not apply where the user sells foreign currency (the usual exporter hedge), to hedges of capital-account transactions, or to hedges of interest, coupon or dividend payments that arise from a capital-account transaction such as an ECB. The reserve earns no interest.
Circular 27 extends the reserve to banks' hedges of their own assets and liabilities where they buy foreign currency against INR, and limits non-deliverable INR derivatives offered to non-residents to hedging purposes only.
Source & verification
A.P. (DIR Series) Circular No. 25 (10.10.2026), No. 26 (10.10.2026) and No. 27 (12.10.2026), Risk Management and Inter-Bank Dealings (RBI); Press Release 2026-2027/1305; FAQs on the Foreign Exchange Risk Reserve
Read the official sourceRead and verified on 16 October 2026. We publish on the authority’s own instrument, never on a report of it.