🗞️ Why in News On 10 October 2026 the Reserve Bank of India (RBI) issued two circulars to Authorised Dealers that tighten the rules on foreign exchange derivative contracts involving the rupee. Circular No. 26 introduces a Foreign Exchange Risk Reserve (FERR): for contracts above USD 2 million where a user buys foreign currency to hedge a current account payment, the bank must keep 20 per cent of the contract’s rupee value as cash with the RBI until the contract ends. Circular No. 25 bars the rebooking of cancelled contracts and cuts a hedging threshold from USD 100 million to USD 5 million. The same day the RBI announced a special dollar window for the three public sector oil marketing companies, which will start on 12 October. A day earlier, on 9 October, it raised the daily minimum CRR banks must keep from 90 to 99 per cent of the requirement, from the fortnight beginning 16 October.
The Measures at a Glance
The package’s measures arrived in several documents over two days. Read the table first; each row is explained below.
| Measure | What changes | Instrument | Takes effect |
|---|---|---|---|
| Foreign Exchange Risk Reserve (FERR) | Banks keep 20% of the rupee value of certain hedging contracts as cash with the RBI | A.P. (DIR Series) Circular No. 26, 10 October 2026 | Contracts undertaken after the circular issued |
| No rebooking of cancelled contracts | A cancelled rupee derivative contract cannot be rebooked; rollover on maturity is still allowed | A.P. (DIR Series) Circular No. 25, 10 October 2026 | Immediate |
| Lower threshold without proof of exposure | USD 100 million → USD 5 million, over-the-counter and on exchanges | Circular No. 25 | Immediate |
| Undertaking against double hedging | User certifies the same exposure is not hedged with another bank | Circular No. 25 | Immediate |
| Dollar window for oil PSUs | RBI meets the entire daily dollar requirement of IOCL, HPCL and BPCL | Press release 2026-2027/1306, 10 October 2026 | 12 October 2026 (Monday), until further notice |
| Daily CRR floor | Minimum daily CRR rises from 90% to 99% of the requirement | Circular RBI/2026-27/290, 9 October 2026 | Fortnight beginning 16 October 2026 |
Key Terms in Plain Words
| Term | Meaning, as used in these circulars |
|---|---|
| Foreign exchange derivative contract | A contract whose value depends on an exchange rate, used here to fix the cost of a future foreign currency payment or receipt |
| Hedging | Using such a contract to cover a real exposure, so that a move in the rupee does not change what a firm pays or earns |
| User | The customer who takes the contract from the bank |
| Authorised Dealer (AD) | An entity authorised by the RBI to deal in foreign exchange; both circulars are addressed to “All Authorised Dealers” |
| Notional amount | The face amount of the contract, the sum on which it is written |
| Current account transaction | A payment for trade in goods and services and similar flows, as distinct from investment (capital account) flows |
| Rollover | Extending a contract at maturity, as opposed to cancelling it before maturity |
The Foreign Exchange Risk Reserve, Step by Step
The RBI’s stated purpose is one line: “With a view to ensuring the orderly functioning of the foreign exchange market”. It gives no other reason. Circular No. 26 then sets four rules.
- Who keeps it. Authorised Dealers “shall be required to maintain a Foreign Exchange Risk Reserve (FERR) for foreign exchange derivative contracts involving INR undertaken with users”.
- Which contracts. All such contracts “of notional value exceeding USD two million equivalent undertaken for the purpose of hedging current account transactions where the user is purchasing foreign currency against INR”.
- How much. The reserve “shall be equal to 20 per cent of the INR equivalent of the notional amount of each derivative contract”.
- In what form, and for how long. It is “deposited and maintained by way of cash in India with the Reserve Bank on a daily basis and shall be maintained until the termination of the contract.”
A worked example. A user takes a contract to buy USD 3 million against the rupee to pay for an import. The contract is above USD 2 million, hedges a current account payment, and the user is buying foreign currency. So the bank must keep cash equal to 20 per cent of the rupee value of USD 3 million, that is the rupee value of USD 600,000, with the RBI every day until the contract ends.
Closing the loopholes.
- No splitting. “Any attempt by users to circumvent the requirements ... through undertaking multiple transactions with one or more Authorised Dealers shall be considered as a violation of these Directions.” Breaking a USD 4 million hedge into two USD 2 million contracts, with one bank or two, would be treated as a violation of the Directions.
- Daily reporting. Banks report the FERR they maintain every day through the RBI’s Centralised Information Management System (CIMS).
- New contracts only. The directions apply “to foreign exchange derivative contracts undertaken after the issuance of these Directions.” Contracts already running are not covered.
Who Is Covered, and Who Is Not
| Inside the reserve | Outside the reserve, as the circular is written |
|---|---|
| Rupee derivative contracts with notional value above USD 2 million | Contracts of USD 2 million or less (the test is “exceeding”) |
| Contracts that hedge current account transactions | Contracts that hedge other (for example, capital account) exposures |
| Contracts where the user buys foreign currency against the rupee | Contracts where the user sells foreign currency against the rupee |
| Contracts undertaken after the circular issued on 10 October 2026 | Contracts undertaken before it |
The reserve therefore bears on one side of the market: users who need to buy foreign currency, such as importers paying for goods and services. The circular does not say whether banks may pass the cost of the cash they lock up on to users.
Tighter Rules on Derivative Contracts (Circular No. 25)
Circular No. 25 opens with a different phrase, “In view of evolving market conditions”, and takes immediate effect. It makes three changes to the Master Direction on Risk Management and Inter-Bank Dealings of 5 July 2016.
| Rule | What Circular No. 25 says |
|---|---|
| Rebooking a cancelled contract | An AD “shall not permit users to rebook any foreign exchange derivative contract involving the INR, whether deliverable or non-deliverable, which has been cancelled with any of the Authorised Dealers, after the issuance of these Directions” |
| Rollover on maturity | ADs “may, however, continue to permit users to rollover foreign exchange derivative contracts on maturity”, subject to the Master Direction |
| Positions without establishing an underlying exposure, over the counter | Limit cut from USD 100 million to USD 5 million, across all ADs |
| Same, on exchanges | Single limit across all INR currency pairs cut from USD 100 million to USD 5 million, all recognised stock exchanges together |
| Undertaking | The AD must “obtain and retain an undertaking from the user that the same underlying exposure has not been hedged with any other Authorised Dealer”; hedges booked in parts with other ADs must be shown in it |
| Records | The AD is responsible for compliance and keeps the documents for “a period not less than two years” |
Why these matter. A hedge is meant to cover a real exposure, once. A user who can cancel a contract and book it again at will, or hedge the same exposure with several banks, can use the market to take a view on the rupee rather than to cover a payment. The bar on rebooking, the lower threshold for positions taken without proof of an exposure, and the undertaking all push contracts back towards genuine, documented exposures. The RBI’s press release says the measures are “intended to strengthen market discipline and ensure appropriate risk management in the foreign exchange market, while maintaining an orderly and transparent market environment.”
Do not confuse the two thresholds. The USD 2 million line belongs to the FERR (Circular No. 26). The USD 5 million line is the new limit for taking positions without establishing an underlying exposure (Circular No. 25). They govern different things.
A Dollar Window for the Oil Companies
In a separate press release on 10 October, the RBI said that “On the basis of assessment of current market conditions” it has decided “to open a special window to meet the entire daily dollar requirements of three public sector oil marketing companies (OMCs), viz. Indian Oil Corporation Limited, Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited.”
- How it works: “the Reserve Bank will undertake sale of USD to the public sector OMCs through designated bank/s.”
- When: the facility will come into effect on 12 October 2026 (Monday) and “will remain in place until further notice.”
- What it means: from 12 October, the RBI itself will be the seller of every dollar these three companies need each day. The release gives no figure for that requirement.
The backdrop is crude. In his statement of 7 October, the Governor cited Petroleum Planning and Analysis Cell (PPAC) data: the Indian basket of crude oil averaged US$ 82.0 a barrel in July, US$ 90.2 in August and US$ 116.1 in September. He also said the merchandise trade deficit had widened, “mainly driven by imports of electronic goods and crude oil”.
Liquidity: The Daily CRR Floor Rises to 99 Per Cent
The cash reserve ratio (CRR) is the cash reserve a scheduled bank must maintain at a ratio the RBI prescribes. The rule the circular describes has two parts:
- The average: over each reporting fortnight, the CRR held on average must not fall below the CRR the RBI prescribes.
- The daily floor: on any single day a bank may hold less, but until now not less than 90 per cent of the requirement.
The circular of 9 October 2026, issued under the heading of Section 42(1) of the RBI Act, 1934, says: “On a review of the current liquidity conditions, it has been decided to increase the minimum daily maintenance of the CRR from 90 per cent of the requirement to 99 per cent”, effective from the fortnight beginning 16 October 2026.
What changes and what does not.
- Changes: a bank’s room to hold less than the requirement on any one day shrinks from 10 per cent of the requirement to 1 per cent. From the fortnight beginning 16 October, every day’s holding must be at least 99 per cent of the requirement.
- Does not change: the CRR rate itself. The circular does not alter the prescribed ratio and states no liquidity figure.
- The context, as reported: according to PTI, in a report carried by The Hindu, the move “will help reduce the banking system liquidity, which stood at a surplus of around ₹3.88 lakh crore as of October 8.”
Read it alongside the policy of 7 October, when the MPC raised the repo rate to 5.50 per cent and changed the stance to calibrated tightening (see our 8 October explainer). He said the RBI “will use an appropriate mix of liquidity management tools and strive to align the weighted average call rate (WACR) with the policy repo rate.”
The Backdrop: What the Governor Said on 7 October
The circulars give only “orderly functioning” and “evolving market conditions” as reasons. The Governor’s Statement three days earlier describes the conditions around them.
| Indicator | Figure in the Governor’s Statement, 7 October 2026 |
|---|---|
| Foreign exchange reserves | US$ 734.6 billion, as on 2 October 2026 |
| Reserve adequacy | Import cover of around 11 months; external debt cover of 94.4 per cent |
| Foreign portfolio investment | Net outflows of US$ 10.3 billion, April to 5 October 2026 |
| Merchandise trade deficit | US$ 58.7 billion in July-August 2026, against US$ 55.1 billion a year earlier |
| Indian crude basket (PPAC) | US$ 82.0 (July), 90.2 (August), 116.1 (September) a barrel |
| Global setting | “The sudden reescalation of the West Asia conflict in September and the consequent hardening and volatility in global crude prices” |
| Exchange-rate stance | “orderly adjustments to the exchange rate that are in sync with the underlying macroeconomic fundamentals and curbing excessive volatility” |
The last line is the key to reading the package. The stated aim, in the Governor’s words and in the circulars, is an orderly market and less excessive volatility; neither names a target level for the rupee. The measures work through different channels:
| Channel | Measure |
|---|---|
| Demand for dollar hedges by importers | FERR makes large buy-side hedges costlier to hold |
| Cancel-and-rebook and multiple hedging | Rebooking bar and the undertaking |
| Positions without a documented exposure | Threshold cut to USD 5 million |
| Dollar buying by the three oil companies | Special window from 12 October |
| Surplus rupee liquidity in banks | 99 per cent daily CRR floor from 16 October |
The Legal Basis
| Measure | Powers cited |
|---|---|
| FERR, rebooking bar, threshold, undertaking (Circulars No. 25 and 26) | Sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999, and Section 45W of the RBI Act, 1934 |
| Daily CRR floor | Circular headed Section 42(1) of the RBI Act, 1934 |
| Base rulebook amended | Master Direction, Risk Management and Inter-Bank Dealings, 5 July 2016, “as amended from time to time” |
Both foreign exchange circulars add that they are “without prejudice to permissions / approvals, if any, required under any other law.”
Two Views on the Package
For: an orderly market. The measures target hedging that is not tied to a real, documented exposure. And while the window runs, the three oil companies will get every dollar they need each day from the RBI instead of buying them in the market.
The questions that remain:
- Cost for genuine hedgers. Importers who hedge above USD 2 million now face a bank that must lock up 20 per cent of the contract value in cash. How much of that cost reaches them depends on banks’ pricing, which the circular does not address.
- How long. The oil window runs “until further notice”, and the circulars carry no end date. Temporary measures need a clear review point, or markets read them as permanent.
- Scale. The RBI will supply the oil companies’ dollars itself, but the release does not say how large the daily sales will be.
- Signal versus substance. Curbs on hedging can calm a market, but they can also be read as a sign of strain. The RBI’s own framing (“orderly functioning”, “evolving market conditions”) is deliberately narrow.
Way forward for a Mains answer. Keep the measures targeted at speculative positions rather than at trade hedging; publish review dates; pair short-term curbs with the structural answers the Governor’s data point to, such as a narrower trade deficit and steadier capital inflows.
UPSC Relevance
GS Paper 3: Indian economy; external sector and balance of payments; exchange-rate management; monetary policy and liquidity management; capital flows.
Prelims: Foreign Exchange Risk Reserve (20%, above USD 2 million, buy-side current account hedges); USD 5 million threshold; rebooking bar; CIMS; FEMA, 1999 Sections 10(4) and 11(1); RBI Act Section 45W; CRR daily floor 99% under Section 42(1); forex reserves and import cover.
Mains: the RBI’s tools for managing exchange-rate volatility; macroprudential versus monetary measures; the cost of hedging for trade; oil imports and the rupee; liquidity management after a rate hike.
📌 Facts Corner, Knowledgepedia
Prelims, statement-ready facts:
- FERR introduced by A.P. (DIR Series) Circular No. 26, 10 October 2026; banks keep 20% of the contract’s rupee value as cash with the RBI.
- FERR covers rupee FX derivative contracts above USD 2 million that hedge current account payments where the user buys foreign currency.
- FERR is kept daily until the contract ends; banks report it daily through the RBI’s CIMS; applies to contracts after issuance.
- Circular No. 25: no rebooking of cancelled rupee contracts; rollover on maturity still allowed; immediate effect.
- Threshold for positions without establishing an underlying exposure cut from USD 100 million to USD 5 million (OTC and exchanges).
- Both circulars cite FEMA, 1999 Sections 10(4) and 11(1) and RBI Act, 1934 Section 45W.
- RBI to meet the entire daily dollar needs of IOCL, HPCL and BPCL through a special window from 12 October 2026.
- Daily minimum CRR: 90% → 99% of the requirement from the fortnight beginning 16 October 2026 (Section 42(1), RBI Act).
Prelims, the traps:
- USD 2 million is the FERR line; USD 5 million is the no-proof-of-exposure limit. Different rules, different circulars.
- The CRR rate did not change; only the daily minimum moved from 90% to 99% of the requirement.
- FERR applies only where the user buys foreign currency against the rupee, and only to contracts exceeding USD 2 million.
- Rebooking a cancelled contract is barred; rolling over a contract on maturity is not.
- The oil window was announced on 10 October but starts on 12 October 2026 (Monday), until further notice.
Mains, arguments and keywords:
- Orderly market; excessive volatility; macroprudential curbs; genuine versus speculative hedging; cost of hedging; oil import bill; liquidity management; reserve adequacy.
- Short-term curbs buy time; the durable answers lie in the trade deficit, oil dependence and stable capital inflows.
Interview, be ready for:
- “Should a central bank make hedging costlier to calm a currency market?” Weigh orderly markets against the cost to genuine importers, and say why review dates matter.
Sources: RBI, A.P. (DIR Series) Circular No. 26, Foreign Exchange Risk Reserve, 10 October 2026; RBI, A.P. (DIR Series) Circular No. 25, Risk Management and Inter-Bank Dealings, 10 October 2026; RBI press release 2026-2027/1305, regulatory measures for the foreign exchange market, 10 October 2026; RBI press release 2026-2027/1306, special window for public sector oil marketing companies, 10 October 2026; RBI circular RBI/2026-27/290, change in daily minimum cash reserve maintenance, 9 October 2026; RBI, Governor’s Statement, 7 October 2026; PTI in The Hindu, “RBI raises daily cash reserve ratio requirement for banks”, 10 October 2026.
Source: RBI Foreign Exchange Risk Reserve: 20% FERR and FX Curbs — Ujiyari.com | Free UPSC & State PCS Current Affairs
