Finance

RBI Forex Hedging Rules October 2026: USD 5 Million No-Underlying Limit, Rebooking Ban and 20% Foreign Exchange Risk Reserve

CA Adityavikram Banka

Quick Summary

  • What changed: RBI issued three A.P. (DIR Series) circulars on forex derivatives involving the rupee: Circular No. 25 (RBI/2026-27/291) and Circular No. 26 (RBI/2026-27/292), both dated 10 October 2026, and Circular No. 27 (RBI/2026-27/293) dated 12 October 2026.
  • No-underlying limit cut to USD 5 million: the limit for hedging a contracted exposure without establishing the underlying exposure falls from USD 100 million to USD 5 million equivalent of notional value outstanding, across all Authorised Dealers. The same cut applies to exchange-traded currency derivatives across all recognised stock exchanges.
  • No rebooking after cancellation: a forex derivative contract involving INR that is cancelled with any Authorised Dealer after these Directions cannot be rebooked. Rollover on maturity is still allowed.
  • New undertaking: when you hedge a contracted exposure, your bank must take an undertaking that the same exposure is not hedged with another Authorised Dealer.
  • 20% Foreign Exchange Risk Reserve (FERR): banks must keep 20% of the INR notional of each contract above USD 2 million, booked to hedge current account transactions where the customer buys foreign currency, in cash with RBI until the contract ends.

The RBI forex hedging rules changed in October 2026. On 10 October 2026 the Reserve Bank of India issued two circulars to Authorised Dealers, and on 12 October 2026 a third. Together they cut the “no documents” hedging limit from USD 100 million to USD 5 million, stop the cancel-and-rebook practice, add a new undertaking at the time of booking, and require banks to park a 20% cash reserve with RBI on large rupee-sell hedges for current account payments. Circular No. 25 came into force with immediate effect. Any importer, startup paying foreign vendors or exporter that uses forwards or options with its bank should read this before booking its next contract.

What are the new RBI forex hedging rules from October 2026?

All three circulars amend the position under the Master Direction on Risk Management and Inter-Bank Dealings dated 5 July 2016. They are issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 and Section 45W of the Reserve Bank of India Act, 1934. RBI’s press release of 10 October 2026 says the measures are “intended to strengthen market discipline and ensure appropriate risk management in the foreign exchange market”.

Point What the circular now says Instrument
Hedging contracted exposure without establishing the underlying (OTC, across all Authorised Dealers) USD 5 million notional outstanding (was USD 100 million) Circular No. 25, para 2(c)
Exchange-traded currency derivatives involving INR without establishing the underlying (all recognised stock exchanges combined) USD 5 million (was USD 100 million) Circular No. 25, para 2(c)
Rebooking a cancelled INR derivative contract Not permitted for contracts cancelled after the Directions Circular No. 25, para 2(a)
Rollover on maturity Still permitted, subject to the Master Direction Circular No. 25, para 2(b)
Undertaking that the exposure is not hedged with another bank To be obtained by the bank when it offers the contract Circular No. 25, para 2(d)
Contracts above USD 2 million hedging current account transactions where the customer buys foreign currency Bank keeps a reserve of 20% of INR notional in cash with RBI Circular No. 26

Can I still hedge without showing the underlying exposure?

Yes, but only up to USD 5 million equivalent of notional value outstanding at any point of time, counted across all Authorised Dealers you deal with. Para 2(c) of Circular No. 25 replaces the USD 100 million figure in the proviso to paragraph 2.4(i) of Section I of Part A of the Master Direction. It also replaces the USD 100 million single limit in paragraph 3.4(i) for positions (long or short) in exchange-traded currency derivatives involving INR, across all currency pairs and all recognised stock exchanges combined.

Above USD 5 million outstanding, the existence of the underlying exposure has to be established. Para 3 of Circular No. 25 puts the responsibility for compliance, “including the existence of underlying exposure”, on the Authorised Dealer, which “will take necessary documents and retain them for a period not less than two years”. Above the USD 5 million mark, keep the documents that establish each hedged exposure ready for your bank.

Can a cancelled forward contract be rebooked?

No. Under para 2(a) of Circular No. 25, an Authorised Dealer “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”. The bar is across banks: cancelling with Bank A and rebooking the same contract with Bank B is caught.

Para 2(b) keeps one route open: an Authorised Dealer may continue to permit users to roll over forex derivative contracts on maturity, subject to the Master Direction. If your payment date shifts, plan to roll the contract at maturity rather than cancel it early, because a cancelled contract cannot be rebooked.

What is the new undertaking my bank will ask for?

Para 2(d) of Circular No. 25 requires the Authorised Dealer, at the time of offering a forex derivative contract involving INR to hedge a contracted exposure, to obtain and keep an undertaking from you that the same underlying exposure has not been hedged with any other Authorised Dealer. If you hedge one exposure in parts with more than one bank, the undertaking must show the amounts already booked with the other bank or banks. The bank can take it as part of the deal confirmation, and it is in addition to any other documents the bank may call for under paragraph 2.4(iv) of the Master Direction.

What is the Foreign Exchange Risk Reserve (FERR)?

Circular No. 26 requires Authorised Dealers to maintain a Foreign Exchange Risk Reserve on forex derivative contracts involving INR undertaken with users. Its terms, as the circular states them:

  • Which contracts: each contract of notional value exceeding USD 2 million equivalent, undertaken to hedge current account transactions where the user is purchasing foreign currency against INR. Import payments and payments to foreign vendors are current account transactions in which the payer buys foreign currency.
  • Amount: 20% of the INR equivalent of the notional amount of each contract.
  • Form and period: cash in India with the Reserve Bank, maintained on a daily basis until the contract ends.
  • Who keeps it: the Authorised Dealer, which reports it daily through RBI’s Centralised Information Management System (CIMS).
  • Which contracts are caught by date: contracts undertaken after the issuance of the Directions (10 October 2026).
  • Splitting is a violation: para 3 says any attempt by users to get around the USD 2 million threshold by undertaking multiple transactions with one or more Authorised Dealers “shall be considered as a violation of these Directions”.

The reserve is the bank’s obligation. Circular No. 26 does not prescribe any charge to the customer, so ask your bank how it will price contracts that attract the FERR.

What did the 12 October 2026 circular add?

Circular No. 27 (RBI/2026-27/293) dated 12 October 2026 deals with banks’ own positions and non-resident users:

  • Non-deliverable contracts for non-residents: AD Category-I banks with an operating IFSC Banking Unit, and Standalone Primary Dealers authorised as AD Category-III, could offer non-deliverable derivative contracts (NDDCs) involving INR to non-resident users “without any restriction in terms of purpose” under para 2.3(iii) of the Master Direction. From now on they may offer them to a non-resident user only for the purpose of hedging.
  • FERR on the bank’s own hedges: an Authorised Dealer must also keep a 20% FERR, in cash with RBI, on forex derivative contracts involving INR that it undertakes to hedge the currency risk of its own assets and liabilities, where it buys foreign currency against INR. There is no USD 2 million floor in this part.
  • Date: it applies to contracts undertaken after the issuance of the Directions.

Who is affected?

  • Importers and startups paying foreign vendors that buy dollars forward against INR: the no-underlying limit is now USD 5 million, the undertaking applies to every hedge of a contracted exposure, and contracts above USD 2 million attract the FERR at the bank’s end.
  • Exporters that sell foreign currency forward: the USD 5 million limit, the rebooking bar and the undertaking apply. The FERR in Circular No. 26 covers only contracts where the user buys foreign currency against INR.
  • Treasury users of exchange-traded currency derivatives: the no-underlying position limit is now USD 5 million across all exchanges combined.
  • Non-resident users of INR NDDCs through IFSC Banking Units: hedging purpose only.
  • CAs and finance heads: hedge policies, board-approved treasury limits and bank documentation checklists written around the USD 100 million figure need to be updated.

Action checklist for finance teams

  1. Add up your outstanding notional across all banks. If hedges booked without underlying documents exceed USD 5 million, speak to your banks about the documents they need.
  2. Keep the underlying ready. Hold the invoices, purchase orders or contracts for each hedged exposure; your bank must keep documents for at least two years.
  3. Stop using cancel-and-rebook. Plan hedge tenors around expected payment dates and use rollover on maturity instead.
  4. Prepare the undertaking. Keep a register of each exposure and the amount hedged with each bank, so the undertaking is accurate when you hedge in parts.
  5. Do not split large import hedges. Breaking a contract into pieces at or below USD 2 million to avoid the FERR is a violation under para 3 of Circular No. 26.
  6. Ask your bank about pricing for contracts above USD 2 million that hedge current account payments.

Exporters should read these rules with our post on the export realisation period from 1 October 2026, and businesses receiving foreign payments with our note on same-day credit for cross-border inward payments. Those invoicing in rupees can also see our explainer on Special Rupee Vostro Accounts.

Sources

  • Source: Reserve Bank of India, A.P. (DIR Series) Circular No. 25, RBI/2026-27/291, “Risk Management and Inter-Bank Dealings”, 10 October 2026, rbi.org.in.
  • Source: Reserve Bank of India, A.P. (DIR Series) Circular No. 26, RBI/2026-27/292, “Risk Management and Inter-Bank Dealings – Foreign Exchange Risk Reserve”, 10 October 2026, rbi.org.in.
  • Source: Reserve Bank of India, A.P. (DIR Series) Circular No. 27, RBI/2026-27/293, “Risk Management and Inter-Bank Dealings”, 12 October 2026, rbi.org.in.
  • Source: Reserve Bank of India, Press Release 2026-2027/1305, “RBI Announces Regulatory Measures for the Foreign Exchange Market”, 10 October 2026, rbi.org.in.

Talk to an expert

Hedging import payments or export receivables and want to check your bank limits and documents under the new rules? Tax Update India can help. Book a quick call.

Disclaimer: This article is for general information only and reflects the law as on the date of publication. It is not legal or tax advice. Please consult a qualified professional before acting on it.

CA Adityavikram Banka
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