Story so far: In view of the evolving geopolitical conditions, fluctuations in oil prices and to ensure orderly functioning of the foreign exchange market, the Reserve Bank of India (RBI) on October 10, 2026, issued two circulars, announcing several regulatory measures.
What were the measures?
Restrictions on rebooking of cancelled foreign exchange derivative contracts: as per this Authorised Dealers (ADs) will not permit users to rebook any foreign exchange derivative contract involving INR, whether deliverable or non-deliverable, which has been cancelled with any AD after the issuance of the directions. Rollover of foreign exchange derivative contracts on maturity will continue to be permitted, subject to compliance with the extant regulatory provisions.
Reduction in the threshold for undertaking foreign exchange derivative transactions without establishing underlying exposure: as per this the existing threshold of $100 million equivalent for undertaking foreign exchange 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.
Additional documentation for verification of underlying exposures: As per this ADs will be required to obtain and retain an undertaking from users entering into foreign exchange derivative contracts involving INR to hedge contracted exposures, confirming that the same underlying exposure has not been hedged with any other AD.
Introduction of Foreign Exchange Risk Reserve (FERR): In respect of all foreign exchange derivative contracts involving INR that are for notional value exceeding $2 million equivalent, ADs will be required to maintain with the Reserve Bank an FERR in cash, equal to 20% of the INR equivalent of the notional amount of each transaction.
This FERR will be applicable for foreign exchange derivative contracts involving INR undertaken to hedge current account exposures where the user purchases foreign currency against the INR.
The RBI said these measures would strengthen market discipline and ensure appropriate risk management in the foreign exchange market, while maintaining an orderly and transparent market environment.
What these measures mean?
The RBI’s forex exchange measures are likely to prompt banks to reduce speculative positions, unwind excess exposures and reassess their forward books, particularly following the reduction in the limit for derivative positions without underlying exposure from $100 million to $5 million said Kunal Sodhani, Head of Treasury, Shinhan Bank.
“The restrictions on rebooking cancelled INR-linked derivative contracts should also curb repeated speculative activity,” Mr. Sodhani said.
According to him the new Foreign Exchange Risk Reserve (FERR), requiring a reserve equivalent to 20% of eligible derivative notional exceeding $2 million, is likely to increase banks’ funding and opportunity costs, which may be passed on to customers through wider spreads and higher hedging costs, particularly for longer-tenor transactions.
What were the other measures taken by the RBI to curb volatility in the foreign exchange market?
To arrest the aggressive slide of the rupee, the Reserve Bank of India shifted strategy away from conventional interest rate hikes, such as the 25bps repo hike on October 7 that failed to halt the depreciation, toward direct plumbing and structural market interventions, said Devarsh Vakil, Head of research, HDFC Securities.
The RBI has taken various measures apart from regularly intervening in the OTC and NDf markets to manage rupee volatility including conducting sell buy swaps in the forward market to drain rupee liquidity, said Ritesh Bhansali, Dy CEO, Mecklai Financial Services.
The other measures include Dedicated Dollar Facility for Oil Marketing Companies OMCs, Liberalizing External Commercial Borrowings (ECBs), Encouraging Non-Resident Indian (NRI) Deposits, placing position limits on Authorised Dealers by restricting the Net Open Position Limit (NOPL) of commercial banks to curb proprietary foreign-exchange trading, International Rupee Invoicing via Vostro Accounts, tightening the rules for booking forward contracts by not allowing to rebook cancelled contracts, lowering the threshold for undertaking foreign exchange derivatives without establishing an underlying economic exposure from $100 million to $5 million and introducing FERR, he said.
How will the Dedicated Dollar Facility to public sector oil marketing companies help?
Overall, the measures should improve market discipline and curb speculative dollar demand, although the impact on USD-INR will continue to depend on crude oil prices, foreign portfolio flows and underlying dollar demand, Mr. Sodhani said.
According to Mr. Bhansali the special window for OMC will divert bulk crude purchases away from open exchanges helping to curb sharp currency swings. “It acts only as a band-aid that steadily burns sovereign reserves without curing the trade deficit; hence, it remains viable solely as a brief crisis buffer rather than an enduring strategy,” he emphasised.
“While it stabilises spot volatility, it does not reduce India’s actual import bill or stop foreign capital outflows. Instead of soaking up market liquidity, it shifts the burden directly onto the RBI’s foreign exchange reserves. It is a tactical bridge rather than a permanent fix,” Mr. Vakil said.
What will be the implications?
On forex reserves, the RBI’s decision to directly supply dollars to oil marketing companies from October 12 could initially put pressure on reserves, but it should simultaneously reduce their dollar demand in the interbank market and moderate pressure on the rupee, Mr. Sodhani said.
Why is the Rupee depreciating against the dollar?
The rupee faces depreciation headwinds from persistent U.S. dollar strength, elevated global yields, high crude import bills widening the current account deficit, and geopolitical uncertainties triggering sustained foreign portfolio outflows according to Mr. Bhansali.
Why was the the FCNRB swap measure announced and what are the risks from such dollar mobilisation?
Deploying concessional dollar swaps was a smart emergency shield that quickly restored liquidity and defended the currency, Mr. Bhansali said.
”Yet it carries sharp trade-offs: the central bank assumes open exchange-rate risk on its balance sheet, while building an aggressive maturity overhang that could trigger severe dollar outflows upon expiry if not managed well,” he pointed out.
According to Mr. Vakil the Foreign Currency Non-Resident (Bank) deposits [FCNR(B)] and associated swaps have helped mobilize foreign capital directly into the banking system without immediate spot market depletion.
“Underlying Risks remains as large bulges of maturing dollar deposits require eventual redemption or rollover, creating future liquidity bottlenecks. The central bank or commercial banks bear the ultimate hedging/conversion cost if domestic interest rate differentials or severe depreciation pressures complicate repayment terms,” he stated.
What are the headwinds for rupee?
India remains heavily dependent on energy imports. Even with RBI supplying oil marketing companies directly, the underlying national oil import bill remains massive, said Devarsh Vakil, Head of research, HDFC Securities.
The prolonged West Asia conflict keeps crude oil prices elevated, maintaining structural pressure on the current account balance, he said.
Sustained capital outflows from domestic equities and debt markets continue to exert downward pressure on the currency, he added.
Ongoing global macroeconomic factors and persistent interest rate differentials between advanced economies and emerging markets keep the greenback broadly resilient, he stated.
How has the prolonged West Asia conflict impacted rupee?
Because India buys most of its oil from abroad, rising crude prices mean more dollars must leave the country to pay for fuel. At the same time, ongoing global panic makes foreign investors pull money out of India and flee to the safety of the US dollar, causing the rupee to drop, Mr. Bhansali said.
According to Mr. Vakil the prolonged conflict in West Asia had disrupted global energy supply chains, causing periodic spikes in Brent crude prices. Higher energy prices directly inflate India’s import bill, expand the current account deficit, and drain foreign exchange reserves faster, directly translating into depreciation pressure on the Rupee.
What is the outlook?
The latest measures taken by RBI will definitely help to arrest the recent fall in rupee in the short term and lead to short term rupee appreciation towards 95.5 to 96 in the short term but the structural issues facing rupee will still continue to keep rupee under pressure in the medium term, Mr. Bhansali said.
How much has the Rupee weakened YTD?
The rupee has depreciated by approximately 7% year-to-date. “The RBI’s intervention is entirely sensible to quell reckless speculation and insulate domestic inflation from global price shocks,” Mr. Bhansali said.
“That said, its mandate is rightly limited to dampening erratic volatility rather than protecting a rigid currency level, since opposing persistent global dollar strength would only bleed vital forex reserves,” he added.
Is the RBI justified to arrest the fall?
With the rupee trading near historical lows (touching 96.96 earlier in the year and closing at 96.73), year-to-date losses reflect relentless structural pressures. At YTD fall of 7.09% it is the worst performing among the Asian peers, Mr. Vakil said.
Central banks typically intervene not to override long-term macroeconomic fundamentals, but to curb excessive volatility, prevent disorderly market conditions, manage imported inflation, and maintain financial stability across corporate balance sheets heavily exposed to unhedged foreign debt, he added.
How is rupee placed against other emerging market currencies?
Compared to regional peers that face localised debt crises or sharper macroeconomic structural shocks, the rupee’s decline has been managed via active central bank intervention.
As a major net importer of commodities (especially oil), the rupee tends to be more sensitive to energy price swings and global USD liquidity cycles than export-oriented or commodity-surplus EM currencies, Mr. Vakil said.
Why is RBI so worried?
A rapidly depreciating currency drives up the cost of essential imports (crude oil, electronics, edible oils), feeding domestic retail inflation, Mr. Vakil said.
Unhedged foreign currency borrowings by Indian corporations become prohibitively expensive to service, raising systemic default risks within the banking sector, he stated.
Unchecked one-way depreciation bets can trigger self-fulfilling panic, capital flight, and rapid reserve depletion, he added.
How to handle this situation?
- Strictly adhere to the new $5 million unhedged exposure limit and tighten documentation compliance.
- Utilise permissible vanilla hedging tools early rather than relying on speculative “cancel-and-rebook” strategies.
- Optimise realisation timelines but avoid over-speculating on extreme currency movements given sudden regulatory clampdowns.
- Monitor foreign exchange reserve updates, weekly RBI interventions, and Brent crude movements as key risk barometers before taking unhedged foreign currency exposure, said Mr. Vakil.
Are India’s forex reserves sufficient to handle imports?
Historically, India maintains a healthy foreign exchange reserve buffer covering multiple months of import cover well above traditional safety benchmarks (typically 6 months vs current ~11 months) said Mr. Vakil.
What next?
The short-term implication of the RBI measures is positive but the medium to long term still depends on the external factors like, geopolitical worries, crude oil prices, interest rate differential etc. Broadly, the spot USD INR to trade between 94.50 to 97.50, said Mr. Vakil.