RBI Cuts Forex Hedge Threshold to $5 Million, Adds 20% Reserve

A company using several banks to hedge import payments or export receipts now needs to look again at how those contracts are documented and renewed. On 10 October 2026, the Reserve Bank of India (RBI) reduced a specified relaxation for INR-linked currency hedges from USD 100 million to USD 5 million, restricted rebooking of cancelled derivatives and introduced a 20% Foreign Exchange Risk Reserve (FERR) for certain transactions. The rules took effect immediately.

Two figures in the announcement are easy to confuse. USD 5 million is not a blanket maximum for genuine corporate hedging. It is the revised limit for specified positions taken without having to establish the existence of the underlying exposure under the relevant facility. The 20% reserve is maintained by the authorised dealer with RBI for certain contracts exceeding USD 2 million. It is not a new 20% tax or a mandatory payment by every importer.

What the USD 5 million change actually restricts

RBI Circular No. 25 (RBI/2026-27/291) amends the framework for hedging contracted foreign-currency exposures. A contracted exposure arises from a business transaction already entered into, such as a foreign-currency import payable or export receivable. Under the earlier facility, users could take positions up to USD 100 million of outstanding notional value across authorised dealers for hedging contracted exposure without first establishing that underlying exposure. RBI has reduced that limit to USD 5 million.

The matching relaxation for INR-linked exchange-traded currency derivatives has also fallen from USD 100 million to USD 5 million, measured across all recognised stock exchanges together. These are distinct specified facilities. The amendment does not authorise speculative hedging without a genuine economic exposure; nor does it prohibit a hedge larger than USD 5 million when the applicable underlying-exposure and other regulatory requirements are satisfied.

Consider an importer with a signed contract to pay USD 8 million in three months. The company does not have to leave USD 3 million of genuine exposure unhedged simply because the relaxed threshold is now USD 5 million. Instead, its authorised dealer must apply the relevant verification requirements to the proposed hedge, including evidence of the contracted exposure. The company also cannot treat separate banking relationships as separate fresh USD 5 million allowances under a limit that applies across dealers.

Cancellation and maturity rollover now need different decisions

The same circular says an authorised dealer must not permit a user to rebook an INR-linked foreign-exchange derivative contract, whether deliverable or non-deliverable, if it was cancelled with any authorised dealer after these directions were issued. Switching from one bank to another does not get around the restriction.

RBI continues to permit rollovers on maturity, subject to the existing Master Direction. This is not the same as an early cancellation followed by a new booking. A finance team considering changes to a forward contract should check the terms and regulatory treatment with its bank before cancelling, particularly where the underlying payment date has shifted.

One receivable or payable must not support undisclosed duplicate hedges

When an authorised dealer offers an INR-linked derivative for a contracted exposure, it must obtain and retain an undertaking from the user that the same exposure has not been hedged with another dealer. Where one exposure is legitimately hedged in parts through several banks, the undertaking must disclose the amounts already booked elsewhere. It can form part of the deal confirmation, but it does not remove the bank’s other verification responsibilities.

Circular 25 places responsibility for compliance, including checking the existence of the underlying exposure, on the authorised dealer. Necessary documents must be retained for at least two years. For a company dealing with several banks, this makes a single current exposure register more useful than disconnected dealer-wise spreadsheets. The register should identify the invoice or contract, currency, amount, due date, hedge references, amount booked at each bank, cancellations and the unhedged balance.

Who is covered by the new 20% Foreign Exchange Risk Reserve?

RBI Circular No. 26 (RBI/2026-27/292) applies the FERR when the derivative involves INR, its notional value exceeds USD 2 million equivalent, it hedges a current-account transaction, and the user is buying foreign currency against INR. A current-account exposure typically arises from payments for imports or services, as distinguished from a capital-account transaction. RBI’s forex transactions FAQs provide background on current- and capital-account transactions, although the October 2026 circular governs this new reserve.

All conditions matter. A USD 3 million import-payable hedge that buys dollars against rupees may be covered. A USD 3 million export-receivable hedge in which the exporter sells dollars for rupees does not meet the specified foreign-currency-purchase condition for this FERR. A contract with notional value of exactly USD 2 million does not exceed the threshold. These examples concern FERR alone; other forex-derivative rules may still apply.

For a covered contract, the authorised dealer must deposit cash with RBI equal to 20% of the INR equivalent of the full notional amount of that individual contract. The reserve is maintained daily until the contract terminates and reported through RBI’s Centralised Information Management System (CIMS). The 20% is not charged only on the portion above USD 2 million. Attempts to split a transaction among dealers or contracts to circumvent the threshold are expressly prohibited.

A USD 3 million import hedge, worked through

Assume an Indian company has a genuine USD 3 million import payable and enters into a qualifying USD–INR derivative to buy the required dollars. At an illustrative conversion rate of ₹97 per USD, the INR notional is ₹29.10 crore. The dealer’s FERR would be 20% of ₹29.10 crore, or ₹5.82 crore, maintained with RBI as required. This is a numerical illustration, not a live exchange-rate quote.

The company does not automatically have to pay ₹5.82 crore to RBI. The circular imposes the cash-reserve obligation on the authorised dealer. The bank may need to consider the funding cost in its pricing, but the circular does not establish a universal 20% fee charged to customers. An importer should request the dealer’s actual hedge quote and terms rather than estimating its invoice cost from the reserve percentage.

Which contracts are affected, and when?

The new directions took effect on 10 October 2026. Circular 26 states that its FERR requirement applies to derivative contracts undertaken after the directions were issued. It should not be described as a retroactive reserve on every outstanding hedge. Circular 25’s restriction is framed around INR-linked derivative contracts cancelled after issuance of its directions. The timing and treatment of a particular renewal or existing position must be checked against the actual transaction and the applicable RBI framework.

The RBI announcement accompanying both circulars summarises the four measures: restrictions on rebooking, the smaller underlying-exposure verification relaxation, additional undertakings and the FERR. For the operative conditions, use the two circulars themselves rather than relying only on a press summary.

What a treasury team should change in its next hedge review

• Reconcile the exposure before booking. Match the hedge to the contracted payable or receivable, its amount and due date; identify existing hedges at every bank and relevant exchange positions.
• Check the correct USD 5 million facility. Determine whether the transaction is within the specified relaxed route or requires underlying-exposure evidence. Do not treat it as a blanket prohibition on larger genuine hedges.
• Resolve cancellations before giving instructions. Ask the dealer whether an intended change is an impermissible cancelled-contract rebooking or a maturity rollover permitted under the Master Direction.
• Document cross-bank undertakings. Where exposure is hedged in portions, disclose the amount already booked with other authorised dealers and keep a consistent internal record.
• Identify potential FERR contracts. Confirm notional value, INR involvement, current-account purpose and the direction of foreign-currency purchase. Dealers must handle the daily reserve and CIMS requirements for qualifying contracts.

The hedging rules should also be kept separate from two related finance tasks. Exporters have their own FEMA export-proceeds realisation deadlines, which do not disappear because a receivable is hedged. Accounting teams must separately apply the relevant financial reporting standards to foreign-currency balances; the Ind AS 21 treatment of monetary and non-monetary items concerns translation and exchange differences, while derivative measurement and hedge accounting may require Ind AS 109.

For the cash-management and exposure-control work behind these changes, the corporate treasury guide explains forward contracts, liquidity forecasts and bank-wise hedge records.

Before booking, cancelling or rolling over a hedge under these rules, start with the signed exposure record and the actual wording of Circular 25 and Circular 26. That makes it possible to distinguish a permitted genuine hedge from a documentation shortcut, and a dealer’s cash-reserve obligation from the company’s hedging cost.