RBI Foreign Exchange Risk Reserve: 20% Reserve on Large Import Hedges
For forex hedges booked after 10 October 2026, banks must keep a Foreign Exchange Risk Reserve (FERR) with the RBI equal to 20 per cent of each large contract in which their customer buys foreign currency against rupees. The requirement sits on the bank, not on your company. But it reaches you: it applies to the forwards and options that importers and other foreign-currency payers book to cover current account payments above USD 2 million per contract. The RBI issued FAQs on 15 October 2026 explaining how it works.
Here is what changed, which hedges are caught, and what to check with your bank before your next large booking or rollover.
What the RBI issued
- A.P. (DIR Series) Circular No. 26, 10 October 2026: Authorised Dealers (banks) must maintain FERR on INR foreign exchange derivative contracts with users where the user buys foreign currency against INR to hedge a current account transaction and the contract’s notional value exceeds USD 2 million equivalent.
- A.P. (DIR Series) Circular No. 27, 12 October 2026: extends FERR to INR derivatives that banks use to hedge their own assets and liabilities, where the bank buys foreign currency against INR. It also restricts non-deliverable INR derivatives offered to non-residents through IFSC Banking Units to hedging only.
- RBI FAQs, 15 October 2026: clarify scope, the threshold, exclusions, rollovers and cancellations.
Which hedges are caught
A contract with a user falls under FERR only if all four conditions hold:
| Condition | What the RBI says |
|---|---|
| Currency pair | The contract involves INR. Non-INR pairs (say USD/EUR) are outside FERR. |
| Direction | The user buys foreign currency against INR. Contracts where the user sells foreign currency, the typical exporter hedge, are excluded. |
| Purpose | It hedges a current account transaction, such as an import payment. Capital account hedges are excluded, and so are current account outflows that arise from a capital account transaction, such as ECB interest or dividends to non-residents. |
| Size | The notional exceeds USD 2 million equivalent per contract. Contracts of USD 2 million or less are not covered. For an option structure, the leg with the highest notional is used. |
How the reserve works
- Amount: 20 per cent of the INR equivalent of each contract’s notional. In the RBI’s own example, a USD 10 million contract at ₹95 to the dollar has a notional of ₹95 crore, so the reserve is ₹19 crore.
- Held as cash with the RBI: it sits in the bank’s current account with the RBI, alongside CRR, from the working day after the contract is booked until a day after it ends. It earns no interest and does not count as high-quality liquid assets.
- Partial cancellation: the reserve continues pro rata on the remaining notional, and stops once that falls to USD 2 million or less.
- Rollovers count as new contracts. A hedge booked before the Directions is not covered, but if it is rolled over afterwards, the rolled contract is treated as fresh and FERR applies if it meets the conditions.
- No splitting. Circular 26 says splitting a transaction across banks to stay under the threshold is a violation, and the FAQs tell banks to guard against structuring.
What it does not change
- Your company does not deposit anything with the RBI. The obligation and the daily reporting through the RBI’s CIMS system belong to the bank.
- Exporters’ sell-side hedges, hedges of capital account flows and contracts of USD 2 million or less are outside FERR.
- Contracts booked before the Directions are not covered unless they are rolled over.
- Pricing is not addressed. The circulars and FAQs do not say whether, or how, banks may pass the cost of an interest-free reserve on to customers.
What to do now
- List your buy-side INR hedges above USD 2 million booked on or after 10 October 2026, and any older ones due for rollover.
- Ask your bank in writing whether its forward or option quotes, margins or charges for these contracts will change, and get the answer before your next large booking.
- Check the purpose tagging. Whether a payment is a current account item or one arising from a capital account transaction (such as ECB interest or a dividend) decides whether FERR applies, so make sure the underlying exposure documents you give the bank describe it correctly.
- Do not break large hedges into smaller contracts or spread them across banks just to stay under USD 2 million. The RBI treats that as a violation.
- Brief your treasury and audit teams. Any change in hedge cost feeds into landed import cost and budgeting for the rest of FY 2026-27.
Need help with FEMA and import payments?
TAXAJ advises on FEMA compliance for importers, exporters and foreign-owned companies, from offices in Delhi, Bengaluru, Goa and Bihar. For the export side, see our explainer on the FEMA EXIM Regulations 2026 and the 15-month realisation rule. For every other RBI change, see our FEMA and RBI updates page.
Source: RBI A.P. (DIR Series) Circular No. 26 dated 10 October 2026, A.P. (DIR Series) Circular No. 27 dated 12 October 2026, and FAQs on the Foreign Exchange Risk Reserve dated 15 October 2026. Last updated 16 October 2026. This is general information, not advice on any particular case, and it will be updated if the RBI issues further clarification.
