Summary: The Reserve Bank of India (RBI), through A.P. (DIR Series) Circular No. 27 dated 12 October 2026 (RBI/2026-27/293), has revised its instructions relating to Risk Management and Inter-Bank Dealings. Referring to the Master Direction – Risk Management and Inter-Bank Dealings dated 5 July 2016, the RBI has restricted the offering of non-deliverable derivative contracts (NDDCs) involving the Indian Rupee to non-resident users exclusively for hedging purposes. Previously, Authorised Dealer Category-I banks having operational IFSC Banking Units and Standalone Primary Dealers authorised as Category-III Authorised Dealers were permitted to offer such contracts to non-resident users without any restriction concerning their purpose. The revised directions remove this flexibility and require Authorised Dealers to ensure that such transactions are undertaken only for hedging.
The RBI has also introduced a mandatory Foreign Exchange Risk Reserve (FERR) for foreign exchange derivative contracts involving INR entered into by Authorised Dealers to hedge currency risks arising from their own assets and liabilities. The reserve requirement applies to all such contracts where the Authorised Dealer purchases foreign currency against INR. The prescribed FERR is 20 per cent of the INR equivalent of the notional amount of each derivative contract. The reserve must be deposited and maintained in cash in India with the Reserve Bank on a daily basis and must continue to be maintained until termination of the relevant contract. These requirements establish a specific reserve obligation for covered proprietary currency hedging transactions undertaken by Authorised Dealers.
The revised directions apply to foreign exchange derivative contracts undertaken after issuance of the circular dated 12 October 2026. Accordingly, Authorised Dealers must distinguish between NDDCs offered to non-resident users for permitted hedging purposes and derivative contracts undertaken to hedge their own currency exposures, for which the prescribed FERR requirement applies. The circular has been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999, and Section 45W of the Reserve Bank of India Act, 1934. The RBI has clarified that these directions operate without prejudice to any permissions or approvals required under other applicable laws.
Reserve Bank of India
RBI/2026-27/293
A.P. (DIR Series) Circular No. 27 | Dated: October 12, 2026
To,
All Authorised Dealers
Madam/Sir,
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.
Yours faithfully,
(Dimple Bhandia)
Chief General Manager
