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The Reserve Bank of India (RBI) on Saturday announced a host of restrictive measures relating specifically to foreign exchange (forex) derivatives contracts even as it opened a special window to meet the entire daily dollar requirements of three public sector oil marketing companies (OMCs) in view of the evolving conditions and to ensure orderly functioning of the forex market.

This comes in the backdrop of the rupee weakening against the US dollar and may be aimed at staving off the possibility of the rupee breaching the 97 mark against the US dollar.

As part of the restrictive measures relating specifically to forex (fx) derivatives, the central bank said Authorised Dealers/ AD (Banks authorised to deal in forex) cannot permit users to rebook any forex derivative contract involving INR (Rupee).

Such forex derivative contracts, whether deliverable or non-deliverable, will include those that have been cancelled with any Authorised Dealer after the issuance of the Directions. Rollover of foreign exchange derivative contracts on maturity shall continue to be permitted, subject to compliance with the extant regulatory provisions.

The existing threshold of $100 million equivalent for undertaking forex derivative transactions to hedge contracted exposures without establishing the existence of the underlying exposure has been reduced to $5 million equivalent, across all ADs.

The corresponding threshold for taking positions in exchange-traded currency derivatives involving INR, without establishing the existence of underlying exposure, has also been reduced from $100 million to $5 million equivalent, across all Recognised Stock Exchanges taken together.

RBI said ADs will be required to obtain and retain an undertaking from users entering into forex derivative contracts involving INR to hedge contracted exposures, confirming that the same underlying exposure has not been hedged with any other Authorised Dealer.

In respect of all fx derivative contracts involving INR that are for notional value exceeding $2 million equivalent, AD is required to maintain with the Reserve Bank an Foreign Exchange Risk Reserve (FERR) in cash, equal to 20 per cent of the INR equivalent of the notional amount of each transaction. T

This FERR is applicable for ffx derivative contracts involving INR undertaken to hedge current account exposures where the user purchases foreign currency against the INR.

V Rama Chandra Reddy, Head - Treasury, Karur Vysya Bank, said introducing a 20 per cent cash Foreign Exchange Risk Reserve (FERR) on specified transactions exceeding $2 million will Impose an additional liquidity cost on covered transactions and discourage excessive positions.

He opined that the central objective appears to be curbing excessive speculative positions, preventing duplicate hedging of the same exposure and ensuring that foreign exchange derivatives are used primarily for genuine risk management.

“While banks may face higher compliance and liquidity costs, customers undertaking genuine hedging may experience additional documentation and some repricing. The measures could moderate speculative activity and promote orderly market conditions.

“It would therefore be more credible to say the measures may help moderate excessive positioning rather than claim that they will necessarily strengthen the currency. The rupee will continue to be influenced by global factors and underlying dollar demand and supply,” Reddy said.

Meanwhile, on the basis of assessment of current market conditions, RBI has decided to open a special window to meet the entire daily dollar requirements of three public sector oil marketing companies (OMCs) -- Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation.

Under the facility, the central bank will undertake sale of USD to the public sector OMCs through designated bank/s. The facility will come in effect from October 12, 2026 and will remain in place until further notice.

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