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RBI Tightens Forex Derivative Rules to Curb Rupee Volatility
The Reserve Bank of India announces regulatory measures on 10 October 2026 to curb speculative activity in the foreign exchange market and manage rupee volatility amid geopolitical uncertainty and elevated crude oil prices. The measures tighten rules for INR-linked foreign exchange derivatives, reduce exposure thresholds, add documentation requirements, and mandate a Foreign Exchange Risk Reserve for specified contracts.
RBI Forex Derivative Regulatory Measures:
| Dimension | Key Details |
|---|---|
| Authority | The Reserve Bank of India regulates the foreign exchange market through regulatory measures to manage volatility. |
| Rupee depreciation | Rupee depreciation refers to a decline in the value of the Indian rupee relative to another currency, such as the US dollar. |
| Reported depreciation magnitude | As per the RBI’s latest report, the rupee has depreciated by approximately 7% since the beginning of 2026. |
| Factors influencing rupee value | The rupee’s value is influenced by domestic economic conditions, international capital flows, and global currency movements. |
| Causes of rupee depreciation | The article cites these causes: strong US dollar, high crude oil prices, foreign portfolio outflows, geopolitical uncertainty linked to prolonged conflict in West Asia, and interest rate differentials. |
| Cancelled derivative contracts | The RBI’s directions regulate rebooking by providing that Authorised Dealers do not permit users to rebook INR-linked foreign exchange derivative contracts cancelled after the directions are issued. |
| Contract rollover at maturity | The RBI’s directions authorise contract rollovers at maturity, subject to regulatory requirements. |
| Exposure threshold without underlying exposure | The RBI has reduced the threshold for undertaking foreign exchange derivative transactions without establishing an underlying exposure from $100 million to $5 million. |
| INR-linked exchange-traded currency derivatives threshold | The RBI has reduced the threshold for INR-linked exchange-traded currency derivatives to $5 million across recognised stock exchanges. |
| Documentation requirement for ADs | The RBI’s directions mandate that Authorised Dealers obtain and retain an undertaking from users confirming that the same underlying exposure has not been hedged through another dealer. |
| Foreign Exchange Risk Reserve (FERR) | The RBI’s directions mandate that for eligible INR-linked foreign exchange derivative contracts with notional value exceeding $2 million, Authorised Dealers maintain a FERR with the RBI in cash equivalent to 20% of the rupee value of the notional amount. |
| Other RBI interventions | The RBI’s interventions comprise: dedicated dollar facility for oil marketing companies; foreign exchange swaps (sell-buy swaps in the forward market); liberalisation of External Commercial Borrowings rules; measures to encourage NRI deposits; position limits on banks’ net open foreign exchange positions; and international rupee invoicing via Vostro account arrangements. |