RBI FAQs on Foreign Exchange Risk Reserve: $2 Million Threshold, Options, Rollovers, Reporting
The Reserve Bank of India released a set of 22 frequently asked questions on the Foreign Exchange Risk Reserve on 15 October 2026, through press release 2026-2027/1334, to settle how authorised dealers must apply the reserve introduced by A.P. (DIR Series) Circular No. 26 of 10 October 2026 and extended by A.P. (DIR Series) Circular No. 27 of 12 October 2026. The FAQs confirm the five conditions a customer contract must meet before the reserve applies, fix the threshold at a notional above USD 2 million equivalent, lay down how option structures, partial cancellations and rollovers are treated, and set a daily reporting deadline of 5 PM on T+1 through the Centralised Information Management System.
The reserve itself is unchanged: 20 per cent of the rupee equivalent of the notional of each qualifying contract, held as cash in the bank's current account with RBI, earning no interest, until a day after the contract ends. What the FAQs add is the operating detail that treasury teams, forex dealers and the chartered accountants who audit them were missing when the first circular landed. The earlier CA Samaaj report on the 10 October hedging restrictions and the 20 per cent reserve covers Circular No. 25 and the first version of the reserve; this piece deals with what the FAQs and Circular No. 27 add on top of it.
One naming point first. The circulars and the press release call the measure the Foreign Exchange Risk Reserve. The FAQ page on the RBI website carries the heading Foreign Exchange Reserve Ratio. Both expand to FERR and refer to the same requirement.
Five conditions for a customer contract to attract FERR under Circular No. 26
Under A.P. (DIR Series) Circular No. 26 (RBI/2026-27/292), a derivative contract between an authorised dealer and a user attracts the reserve only when all five of the following are true: the contract involves the rupee; the counterparty is a user, meaning any person under section 2(u) of the Foreign Exchange Management Act, 1999, resident or non-resident, other than an authorised dealer; the user is buying foreign currency against the rupee; the notional exceeds USD 2 million equivalent; and the contract hedges a current account transaction.
Each condition carries its own exclusion. A user selling foreign currency against the rupee, which is the typical exporter hedge, is outside the reserve entirely. A hedge of a capital account transaction is outside it. A contract between two foreign currencies with no rupee leg is outside it. A contract with notional at or below USD 2 million is exempt, although the FAQs repeat the circular's warning that dealers must guard against transactions being structured to stay under the line, and Circular No. 26 treats splitting a contract across one or more dealers as a violation of the Directions. Contracts between an authorised dealer and RBI itself do not attract the reserve.
The reserve is also prospective. It applies only to contracts undertaken after the respective circular was issued, 10 October 2026 for customer contracts and 12 October 2026 for banks' own hedges. A contract booked on 9 October carries no reserve for its remaining life unless it is rolled over, a point dealt with below.
ECB interest, dividends and coupons: excluded for the customer, reserved for the bank
The question most corporate treasuries were asking was about outflows that are current account in nature but arise from a capital account transaction: interest on an external commercial borrowing, coupons on rupee bonds held by non-residents, and dividends remitted to foreign shareholders. Section 2(j) of FEMA classifies these payments as current account transactions. The FAQs nevertheless keep a user's hedge of such outflows outside Circular No. 26, so an Indian company buying dollars forward to meet its ECB interest does not trigger the reserve on that contract.
The exclusion does not travel to the bank. When an authorised dealer hedges its own currency risk on the same kind of exposure, the contract falls under Circular No. 27 and the reserve applies. A company and its bank can therefore sit on opposite sides of the line on economically similar flows.
Banks' own hedges and NDDCs under Circular No. 27
A.P. (DIR Series) Circular No. 27 (RBI/2026-27/293), issued two days after the first circular, does two things. It restricts non-deliverable derivative contracts involving the rupee that AD Category-I banks with an IFSC Banking Unit and standalone primary dealers authorised as AD Category-III may offer to non-residents: such contracts may now be offered only for hedging, where the Master Direction on Risk Management and Inter-Bank Dealings of 5 July 2016 earlier allowed them for any purpose. And it extends the 20 per cent reserve to every rupee derivative an authorised dealer undertakes to hedge the currency risk of its own assets and liabilities where the bank is buying foreign currency against the rupee.
The FAQs confirm that market-making and proprietary positions are outside Circular No. 27. The reserve on the bank's own book is confined to hedges of its own assets and liabilities. The circular's text applies to all such contracts, and the USD 2 million threshold in the FAQs is framed around contracts between a dealer and a user, so banks should not assume the exemption for small notionals carries over to their own hedges.
How the USD 2 million threshold and the 20 per cent are measured for options
For a plain forward, the notional is the contract amount. For options, the FAQs apply the threshold to the notional of the option contract. Where two or more options are combined into a single structure, the structure is treated as one contract, and the single option with the highest notional is used both for the threshold test and for computing the reserve. The reserve is then 20 per cent of the rupee equivalent of that notional, and the FAQs give the plain case: a USD 10 million contract at ₹95 per dollar has a rupee notional of ₹95 crore and attracts a reserve of ₹19 crore.
As an illustration of the option rule, take an importer who buys a structure made up of a bought dollar call on USD 2.5 million and a sold dollar put on USD 5 million, at a spot reference of ₹95. The structure is one contract. Its notional for FERR purposes is the larger leg, USD 5 million, which exceeds the USD 2 million threshold even though the bought leg on its own does not. The rupee equivalent is 5,000,000 × 95 = ₹47.50 crore, and the bank must hold 20 per cent of that, ₹9.50 crore, from the working day after the trade. Pricing the smaller leg below the threshold does not take the structure out of the reserve.
Day-by-day maintenance: start, pro rata cuts, rollovers and exit
The reserve is maintained in the dealer's current account with RBI on a gross, transaction-by-transaction basis; there is no netting of buy and sell contracts and no portfolio-level offset. The FAQs set out when it starts and when it moves, which this table brings together.
| Event in the life of the contract | Treatment of the reserve | Timing |
|---|---|---|
| Contract undertaken | 20 per cent of rupee notional held in the current account with RBI | From the working day after the contract date |
| Partial cancellation | Reserve reduced pro rata to the remaining notional | From the day after the cancellation |
| Remaining notional falls to USD 2 million or below | Reserve ceases on that contract | From the day after the reduction |
| Rollover of a contract booked before 10 or 12 October 2026 | Treated as a fresh contract; reserve applies if the five conditions are met | From the working day after the rollover |
| Contract terminates or matures | Reserve released | Held until one day after termination |
The rollover rule is the one with immediate effect on existing books. A forward booked in September that is rolled this month becomes a post-circular contract on the roll date, and if it hedges an import or other current account payment above USD 2 million, the bank's reserve starts the next working day. Companies with rolling hedge programmes should expect the forward points quoted on rolls to reflect this from now on, even where the original hedge was reserve-free.
What the reserve means for CRR, interest and the liquidity coverage ratio
The reserve sits in the same current account as the cash reserve ratio balance, and the FAQs are explicit that the two are not fungible. The daily minimum balance in the account must be at least the sum of the bank's obligation under section 42(1) of the Reserve Bank of India Act, 1934, the FERR under the 10 October and 12 October 2026 Directions, and any other cash reserve obligation to RBI. The reserve earns no interest, and balances held as FERR are not eligible as high quality liquid assets under the liquidity coverage ratio framework. For a bank, the cost of the reserve is therefore the full carrying cost of idle cash plus the loss of HQLA credit, not merely the interest forgone.
Daily CIMS reporting by 5 PM on T+1
Authorised dealers must report the reserve daily through CIMS, covering both customer contracts under Circular No. 26 and the bank's own hedges under Circular No. 27. The report for a given date T is due by 5 PM on the following working day, and it must list the contracts undertaken on T as well as all outstanding contracts, with their current notional, against which the reserve is being held. The reporting format is available within CIMS. Separately, the FAQs require dealers to maintain granular records of each qualifying transaction and the reserve computed on it, and state that these records are subject to audit; statutory and concurrent auditors of banks should expect to test the daily FERR computation against the CIMS submissions from the October 2026 quarter onwards.
Forward quotes now carry 11 to 14 paise a month of FERR cost
Banks have begun pricing the reserve into forward quotes. A Reuters report of 14 October 2026 put the additional cost to importers at about 11 to 14 paise per dollar per month, varying with the bank's cost of funds and rising with tenor, and noted that hedging demand has shifted towards forwards of up to three months. On those quotes, a three-month forward purchase of USD 5 million to pay for imports carries roughly ₹16.5 lakh to ₹21 lakh of additional cost (5,000,000 × 0.33 to 0.42), an illustration using the market range rather than a figure in any RBI document. The same report notes that the rupee's recovery to 94.72 per dollar from near 96.70 the previous week has, for many importers, outweighed the extra charge.
For corporate finance teams, three checks follow from the FAQs. Hedges of export receivables and any contract where the company sells foreign currency carry no reserve and should not be quoted as if they did. Hedges of ECB interest, bond coupons and dividends to non-residents are outside Circular No. 26, so a bank's quote on those should not include a FERR component for the customer leg. And on every rollover from here on, the quote should be read against the five conditions, because the roll is a fresh contract. The FAQ page itself already carries a last-updated stamp of 17 October 2026, two days after release, so a printed copy taken in the first week should be checked against the live page before it is relied on.
Official source: View the official source document
