RBI Clarifies Guidelines on Foreign Exchange Risk Reserve Calculations
The RBI has issued new guidelines regarding the Foreign Exchange Risk Reserve, clarifying its scope and calculation methods for derivatives.
Mumbai, October 15 (Daily Kiran) : The Reserve Bank of India (RBI) has released a set of Frequently Asked Questions (FAQs) regarding the scope and calculation of the Foreign Exchange Risk Reserve (FERR), which stands at 20 percent. This announcement was made on October 15, 2026, and aims to clarify certain hedging transactions that may be exempt from this requirement.
According to the RBI, the FERR will apply to user contracts exceeding $2 million, where users purchase foreign currency in exchange for Indian rupees to hedge against risks associated with current account transactions. However, contracts that involve selling foreign currency for rupees and those related to capital account transactions are excluded from this reserve.
The FAQs specify that the FERR requirement pertains to designated derivative contracts executed by authorized dealers with users, where the notional value exceeds $2 million. Contracts with a notional value of $2 million or less will not be subject to this requirement. Authorized dealers must remain vigilant against any attempts to manipulate the structure of derivative transactions to evade these provisions.
The RBI further clarified that the FERR will not apply to derivative contracts that users enter into for hedging payment risks arising from capital account transactions. Payments related to external commercial borrowing (ECB) interest, coupon payments on resident debt instruments held by non-residents, and dividends paid to foreign investors are included in these current account transactions under the Foreign Exchange Management Act (FEMA).
The FERR requirement is solely applicable to foreign exchange derivative contracts linked to the Indian rupee. Contracts that do not involve the Indian currency are outside its scope.
However, the requirement for banks to maintain reserves for eligible hedging transactions arising from these risks will remain unchanged. The FERR amount will be 20 percent of the equivalent value in Indian rupees of each applicable derivative contract’s notional amount.
For instance, if a derivative contract is executed at an exchange rate of 95 rupees per US dollar with a notional amount of $10 million, the notional amount would be equivalent to 950 million rupees, resulting in an FERR of 190 million rupees.
The FERR must be deposited and maintained in the authorized dealer’s current account with the Reserve Bank, and this reserve is mandatory to maintain on a daily basis.
The FERR for a specific derivative contract must be maintained starting from the business day immediately following the contract date. This requirement will apply separately and on a gross basis for each derivative transaction.
Moreover, authorized dealers are required to keep detailed records of eligible transactions and their associated FERR, which will also be subject to audit.
The RBI has clarified that no interest will be paid on the FERR maintained by authorized dealers with the Reserve Bank. The FERR for a specific derivative contract must be retained until the day after the contract’s expiration.
