The Reserve Bank of India (RBI) has introduced a Foreign Exchange Risk Reserve (FERR) for authorised dealers. This new directive, issued on October 10, 2026, aims to ensure the orderly functioning of India’s foreign exchange market. Additionally, it places clear obligations on banks handling INR-linked derivative contracts.
Key Details of the Foreign Exchange Risk Reserve
Authorised dealers must now maintain a Foreign Exchange Risk Reserve against foreign exchange derivative contracts involving INR with users. The reserve applies to all contracts with a notional value exceeding USD 2 million equivalent. However, it specifically covers contracts used for hedging current account transactions where the user buys foreign currency against INR.
The FERR amount equals 20% of the INR equivalent of each contract’s notional value. Dealers must deposit and hold this reserve as cash in India with the RBI on a daily basis. Therefore, the reserve stays in place until the contract terminates.
Dealers must also report their daily FERR details through the RBI’s Centralised Information Management System (CIMS). This reporting requirement ensures transparency and close monitoring of market activity.
What This Means for Authorised Dealers and Users
The RBI has made clear that attempts to bypass these rules will invite strict action. For example, splitting transactions across multiple authorised dealers to stay below the USD 2 million threshold will be treated as a direct violation. As a result, both dealers and users must exercise caution when structuring forex derivative deals.
These directions apply to all foreign exchange derivative contracts entered into after the issuance of this circular. Meanwhile, existing contracts remain unaffected by the new reserve requirement. Authorised dealers should review their current compliance frameworks immediately.
The RBI issued these directions under Sections 10(4) and 11(1) of FEMA, 1999, and Section 45W of the Reserve Bank of India Act, 1934. This regulatory move signals the central bank’s intent to strengthen risk controls in India’s forex derivatives market.
Source: RBI Notifications
