Forex Derivatives by NRIs Allowed Only for Hedging with 20% Deposit to Check Rupee Fluctuations

The RBI has restricted INR-linked NDDCs offered to non-residents to hedging purposes only and introduced a 20% cash reserve requirement for specified INR-linked foreign exchange derivatives undertaken by Authorised Dealers to hedge their own currency risk. These measures increase compliance and liquidity requirements for covered transactions.

· Restriction on NDDCs for Non-Residents: Authorised Dealers (ADs) shall henceforth offer non-deliverable derivative contracts (NDDCs) involving INR to non-resident users only for hedging purposes. The earlier unrestricted-purpose facility has been curtailed.

· Applicability to Authorised Dealers: The revised restriction applies to Authorised Dealer Category-I banks with an operating IFSC Banking Unit and Standalone Primary Dealers authorised as Authorised Dealer Category-III.

· Introduction of Foreign Exchange Risk Reserve (FERR): An Authorised Dealer must maintain a FERR for foreign exchange derivative contracts involving INR undertaken to hedge currency risk arising from its own assets and liabilities.

· Contracts Covered: FERR applies to all foreign exchange derivative contracts involving INR where the Authorised Dealer purchases foreign currency against INR.

· FERR Requirement: The reserve shall be 20% of the INR equivalent of the notional amount of each derivative contract.

· Deposit and Maintenance: FERR must be deposited and maintained in cash in India with the Reserve Bank of India on a daily basis and retained until termination of the contract.

· Effective Date: The directions apply to foreign exchange derivative contracts undertaken after issuance of these directions.

· Legal Authority: Issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999, and Section 45W of the Reserve Bank of India Act, 1934.

[A.P. (DIR Series) Circular No. 27 dated October 12, 2026]

Risk Management and Inter-Bank Dealings

Attention of Authorised Dealers is invited to Master Direction - Risk Management and Inter-Bank Dealings dated July 05, 2016, as amended from time to time.

2. In terms of Para 2.3 (iii) of Section I of Part A of the Master Direction ibid, Authorised Dealer Category-I banks with an operating IFSC Banking Unit and Standalone Primary Dealers authorised as Authorised Dealer Category-III may offer non deliverable derivative contracts (NDDCs) involving INR to non-resident users without any restriction in terms of purpose. On a review, it has been decided that henceforth, Authorised Dealers shall offer NDDCs involving INR to a non-resident user only for the purpose of hedging.

3. Further, it has been decided that:

i. An Authorised Dealer shall be required to maintain a Foreign Exchange Risk Reserve (FERR) for foreign exchange derivative contracts involving INR undertaken by it for hedging the currency risk of its own assets and liabilities;

ii. The FERR shall be applicable to all foreign exchange derivative contracts involving INR where the Authorised Dealer is purchasing foreign currency against INR;

iii. The FERR shall be equal to 20 per cent of the INR equivalent of the notional amount of each derivative contract; and

iv. The FERR shall be 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.

4. These Directions shall be applicable to foreign exchange derivative contracts undertaken after the issuance of these Directions.

5. These Directions are issued in exercise of the powers conferred by Sections 10(4) and 11(1) of the FEMA, 1999, and Section 45W of the Reserve Bank of India Act, 1934, and are without prejudice to permissions / approvals, if any, required under any other law.