An Indian business may need dollars to pay a bill in a few months. A forward contract lets it agree on an exchange rate now. That helps it plan the rupee cost. This protection is called a currency hedge. But the bank arranging it may have to set aside cash.
The Reserve Bank of India explained these rules on October 15, 2026. Its FAQs cover the new Foreign Exchange Risk Reserve, or FERR. The reserve earns no interest. That can affect the cost and supply of currency hedges.
The Breakdown
The customer rule dates from October 10. It covers rupee-linked currency derivatives, which are contracts tied to exchange rates. The customer must be buying foreign currency with rupees to hedge a current-account payment, such as an import bill. The contract’s notional value must also exceed $2 million in dollar terms. Notional value means the amount the contract covers. All these conditions must apply.
For each covered contract, the authorised dealer must hold cash with the RBI. The reserve is 20% of the full notional amount, worked out in rupees. In the RBI’s example, a $10 million contract uses a rate of ₹95 per dollar. Its notional value is ₹95 crore. The reserve is ₹19 crore.
The dealer has to hold this cash. The rule does not make the customer pay a 20% fee.
What The FAQs Clarify
Under the October 12 circular, banks’ market-making and proprietary trades are exempt from FERR. Market-making means quoting prices at which others can buy and sell. Proprietary trading means trading for the bank’s own account.
That exemption applies to FERR alone. A separate October 12 rule still limits certain trades with non-resident customers. Banks can offer them rupee-linked non-deliverable derivatives only for hedging. These settle the gain or loss in cash, without exchanging the full currency amounts.
A bank may also hedge currency risks on its own assets and liabilities. These are what it owns and owes. Those hedges still need the reserve when they meet the rules and involve buying foreign currency with rupees. This separate bank rule has no $2 million threshold.
Customer hedges that sell foreign currency for rupees are exempt. So are customer capital-account hedges, which cover flows such as loans and investments. Certain related payments are also exempt. Examples include interest on overseas loans and dividends due to non-resident investors. This last exemption does not apply when a bank hedges its own risk under the separate bank rule.
Why This Matters
The reserve earns no interest. Banks must hold it on top of their usual cash reserves. It also cannot count as a high-quality liquid asset under their liquidity coverage rules. Those rules require banks to hold assets they can use to meet cash needs in a period of stress.
Setting aside more cash has a cost. Banks may pass some of that cost on through the price of a hedge. The FAQs do not set a fee that all customers must pay. The final cost depends on the deal and its price.
Timing matters too. Contracts made before the relevant October rules are exempt. A later rollover, which renews a contract, counts as a fresh one. It can require a reserve if it meets the rules. Splitting a deal to avoid the threshold is banned.
The Crunch
The FAQs make the rules clearer. The reserve stays in place for hedges that fall within them. For a business, today’s exchange rate is one concern. The cost of fixing a rate for a future payment is another. These answers promise neither cheaper hedges nor a set level for the rupee.