RBI FERR FAQs October 2026: Which Forex Hedges Attract the 20% Foreign Exchange Risk Reserve and Which Do Not
Quick Summary
- What is new: on 15 October 2026 the Reserve Bank of India issued 22 Frequently Asked Questions (FAQs) on the Foreign Exchange Risk Reserve (FERR) introduced by A.P. (DIR Series) Circular No. 26 dated 10 October 2026 and Circular No. 27 dated 12 October 2026 (RBI Press Release 2026-2027/1334).
- Five conditions: a bank keeps the 20% FERR on a customer’s contract only if the contract involves INR, is with a user, the user is buying foreign currency against INR, the notional exceeds USD 2 million equivalent, and the contract hedges a current account transaction.
- Outside the reserve: hedges where the customer sells foreign currency, hedges of capital account transactions, and hedges of ECB interest, coupons to non-residents or dividends payable to non-resident investors (FAQ 4 to 6).
- Rollovers count: a contract booked before 10 October 2026 that is rolled over afterwards is treated as a fresh contract and attracts the FERR if it meets the conditions (FAQ 18).
- Options: where two or more options are booked as one structure, the option with the highest notional decides the USD 2 million test and the reserve (FAQ 9).
The RBI FERR FAQs of October 2026 answer the questions treasury teams have been asking their banks since the Foreign Exchange Risk Reserve took effect: which forward and option contracts are caught, which are not, how the USD 2 million threshold is measured and what happens on rollover or part cancellation. The reserve itself is kept by the bank, in cash with RBI. For a company, the FAQs decide whether a particular hedge sits inside the reserve or outside it. If you book forwards or options against INR, read this before your next rollover.
The circulars themselves, the USD 5 million no-underlying limit and the rebooking ban are covered in our post on the RBI forex hedging rules of October 2026. This post deals only with what the FAQs add.
What did RBI issue on 15 October 2026?
RBI’s Press Release 2026-2027/1334 dated 15 October 2026 states that the Reserve Bank “has today issued a set of Frequently Asked Questions (FAQs) to provide clarifications on the Foreign Exchange Risk Reserve (FERR) requirements” introduced by Circular No. 26 dated 10 October 2026 and Circular No. 27 dated 12 October 2026. The FAQs are dated 15 October 2026 and carry 22 questions.
FAQ 1 describes the FERR as a reserve that Authorised Dealers must maintain with RBI on two kinds of contract:
- specified forex derivative contracts involving INR undertaken with users (Circular No. 26); and
- forex derivative contracts involving INR that the Authorised Dealer undertakes to hedge the currency risk of its own assets and liabilities, where it buys foreign currency against INR (Circular No. 27).
A “user” is any person as defined in Section 2(u) of FEMA, 1999, resident in India or outside India, other than an Authorised Dealer (footnote to FAQ 2, referring to the Master Direction on Risk Management and Inter-Bank Dealings dated 5 July 2016).
Which forex hedges attract the 20% FERR?
Under FAQ 2, a contract between a bank and a user attracts the FERR only when all five conditions are met:
- the contract involves INR;
- the contract is undertaken with a user;
- the user is purchasing foreign currency against INR;
- the notional value of the contract exceeds USD 2 million equivalent; and
- the contract is undertaken for hedging current account transactions.
FAQ 8 confirms the threshold: a contract with a notional of USD 2 million equivalent or less is not subject to the requirement. The same answer adds that “the Authorised Dealers shall guard against any attempt towards structuring of derivative transactions for avoidance of these provisions”. Para 3 of Circular No. 26 already treats splitting a hedge across transactions or banks to stay under the threshold as a violation of the Directions.
Which hedges are outside the FERR?
| Situation | FERR on the bank? | FAQ |
|---|---|---|
| User sells foreign currency against INR (for example, an exporter hedging receivables) | No | 4 |
| Hedge of a capital account transaction | No | 5 |
| User’s hedge of current account outflows that arise from a capital account transaction: interest on ECBs, coupons on resident debt held by non-residents, dividends payable to non-resident investors | No for the user’s contract under Circular No. 26; the bank’s own hedge of such exposures is covered by Circular No. 27 | 6 |
| Contract not involving INR (for example, a USD/EUR hedge) | No | 7 |
| Notional of USD 2 million equivalent or less | No | 8 |
| Contract undertaken before 10 October 2026 (Circular No. 26) or 12 October 2026 (Circular No. 27) | No | 17 |
| Such an older contract rolled over after those dates | Yes, if the rolled-over contract meets the conditions | 18 |
| Bank’s market-making or proprietary positions | No | 3 |
| Bank’s contracts with RBI | No | 22 |
Why are ECB interest and dividend hedges excluded?
FAQ 6 explains the reasoning. Interest on loans and other debt instruments is a current account transaction under Section 2(j) of FEMA, 1999, but these flows arise from an underlying capital account transaction. So a user’s contract hedging such flows is excluded from the FERR under Circular No. 26. The FAQ names three examples: interest on External Commercial Borrowings, coupons on resident debt instruments held by non-residents, and dividends payable to non-resident investors. Where the bank hedges its own currency risk on such exposures, the FERR applies to the bank under Circular No. 27.
For a company with an ECB, the practical point is to tag the hedge to the ECB interest flow at booking, so the bank can see that it falls outside Circular No. 26. Our post on the 2026 ECB rules covers the borrowing side.
How is the USD 2 million threshold measured for options?
FAQ 9 sets two rules:
- for an option contract, the threshold is tested on the notional amount of the option contract undertaken with the user; and
- where two or more options are undertaken together in a single structure, the structure is treated as one derivative contract, and the notional of the single option with the highest notional value is used both for the USD 2 million test and for computing the FERR.
How much is the reserve, and for how long?
FAQ 10: the FERR equals 20 per cent of the INR equivalent of the notional amount of each applicable contract. RBI’s own example: a contract with a notional of USD 10 million against INR at a contracted rate of Rs 95 per USD has a notional of Rs 95 crore, so the FERR is Rs 19 crore.
- Start: the reserve is kept from the working day immediately following the date of the contract, on a gross basis for each transaction (FAQ 11).
- End: it is kept until a day after the contract terminates (FAQ 14).
- Part cancellation: from the next day the FERR is kept pro rata on the notional that remains (FAQ 15). If the remaining notional falls below the USD 2 million threshold, the requirement ceases from the day following the reduction (FAQ 16).
Before cancelling part of a hedge, keep in mind that para 2(a) of Circular No. 25 bars rebooking a forex derivative contract involving INR once it has been cancelled with any Authorised Dealer.
What do the FAQs say about the bank’s side?
- The FERR is deposited in the Authorised Dealer’s current account with RBI and maintained daily. Granular details of qualifying transactions are kept by the bank and are subject to audit (FAQ 11).
- The daily minimum balance in that account must cover the CRR obligation under Section 42(1) of the RBI Act, 1934, the FERR and any other cash reserve obligation, added together (FAQ 12).
- The FERR earns no interest (FAQ 13) and cannot be counted as High Quality Liquid Assets under the Liquidity Coverage Ratio framework (FAQ 21).
- Banks report FERR details daily through RBI’s Centralised Information Management System (CIMS), for both customer contracts and own hedges, by 5 PM on the next working day (FAQ 19 and 20).
The FAQs, like the circulars, place the reserve on the bank. They say nothing about what a bank may charge its customer for it.
Who is affected, and what should they check?
Importers and startups paying foreign vendors
A contract that buys foreign currency against INR to pay for imports or services is a current account hedge. Above USD 2 million notional it falls within the FERR at your bank’s end. Check two things:
- any contract booked before 10 October 2026 that you plan to roll over (FAQ 18); and
- any option structure, where the largest leg sets the test (FAQ 9).
Companies with ECBs or foreign investors
Your hedges of ECB interest, of coupons to non-resident holders and of dividends payable to non-resident investors are outside Circular No. 26 (FAQ 6). Record the purpose of each hedge clearly at booking.
Exporters
Selling foreign currency forward against INR does not attract the FERR (FAQ 4). The USD 5 million no-underlying limit, the rebooking ban and the undertaking under Circular No. 25 still apply.
CAs and finance heads
Map each outstanding and planned INR hedge against the five conditions in FAQ 2: direction, current or capital account, notional, date booked, and whether it is a rollover. Keep the purpose documentation with each deal confirmation.
Sources
- Source: Reserve Bank of India, Frequently Asked Questions, “Foreign Exchange Risk Reserve (FERR)” (Ref: A.P. (DIR Series) Circular No. 26 dated 10 October 2026 and Circular No. 27 dated 12 October 2026), dated 15 October 2026, rbi.org.in.
- Source: Reserve Bank of India, Press Release 2026-2027/1334, “RBI issues Frequently Asked Questions on Foreign Exchange Risk Reserve”, 15 October 2026, rbi.org.in.
- Source: Reserve Bank of India, A.P. (DIR Series) Circular No. 26, RBI/2026-27/292, 10 October 2026, and Circular No. 27, RBI/2026-27/293, 12 October 2026, rbi.org.in.
- Source: Reserve Bank of India, A.P. (DIR Series) Circular No. 25, RBI/2026-27/291, 10 October 2026, rbi.org.in.
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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.
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