RBI clarifies Foreign Exchange Risk Reserve scope: key rules for banks
Synopsis
The RBI has issued detailed FAQs to explain exactly how its 20% Foreign Exchange Risk Reserve works — spelling out a $2 million threshold, an illustrative ₹19 crore example on a $10 million contract, and a firm anti-avoidance warning. For bank treasuries and corporate hedgers, this is the operational fine print that determines daily compliance costs.
Key Takeaways
The RBI issued FERR clarifications on 15 October 2026 , covering scope, calculation, and exemptions.
FERR is set at 20 per cent of the rupee-equivalent notional of each qualifying derivative contract exceeding $2 million .
Contracts involving the sale of foreign currency against the rupee, and those hedging capital-account transactions , are excluded.
FERR earns no interest and must be maintained on a daily gross basis until one day after contract termination.
Authorised dealers must guard against transaction structuring to circumvent the $2 million threshold.
Banks' own qualifying currency hedges continue to attract the FERR requirement.
The Reserve Bank of India (RBI) on Thursday, 15 October 2026, issued a detailed set of FAQs to clarify the scope, calculation, and exemptions under its 20 per cent Foreign Exchange Risk Reserve (FERR) framework. The clarifications cover which derivative contracts attract the reserve requirement, how the reserve amount is computed, and how banks must maintain and report it.
Which contracts attract FERR
The FERR applies to user contracts exceeding $2 million equivalent in which the user purchases foreign currency against the rupee to hedge current-account transactions. Contracts involving the sale of foreign currency against the rupee, and those hedging capital-account transactions, are explicitly excluded.
The RBI further clarified that FERR does not apply to derivative contracts not involving the Indian rupee. It also exempts current-account outflows that arise from capital-account transactions — such as interest on External Commercial Borrowings (ECBs), coupons on resident debt instruments held by non-residents, or dividends payable to non-resident investors — as these are classified as current-account transactions under the Foreign Exchange Management Act (FEMA).
How the reserve is calculated
According to the RBI's FAQs, the FERR is set at 20 per cent of the Indian rupee equivalent of the notional amount of each applicable derivative contract. The central bank provided a worked example: for a contract with a notional amount of $10 million against the rupee at a contracted rate of ₹95 per US dollar, the rupee notional is ₹95 crore, and the applicable FERR is ₹19 crore.
Maintenance and compliance requirements
The FERR must be deposited and maintained in the authorised dealer's current account with the Reserve Bank, on a daily basis. The requirement kicks in from the working day immediately following the date the contract is entered into, and must be maintained on a gross basis — that is, on each individual qualifying transaction, not netted across a portfolio.
Importantly, the FERR maintained with the RBI will not earn any interest. The reserve must remain in place until one day after the termination of the derivative contract. Authorised dealers are required to maintain granular records of qualifying transactions and associated FERR amounts, which will be subject to audit.
Banks' own hedges not exempt
While users' certain hedges are carved out, the RBI specified that banks' own qualifying hedges of currency risks arising from these exposures will continue to attract the FERR requirement. This distinction is significant for treasury operations at large commercial banks with substantial proprietary foreign exchange books.
Anti-avoidance provisions
The RBI's FAQs explicitly warned that authorised dealers must guard against any attempt to structure derivative transactions to avoid the FERR provisions. Contracts with a notional value of $2 million equivalent or less are not subject to the requirement — a threshold the central bank appears conscious could be gamed through transaction splitting. This comes amid broader RBI efforts to bring greater discipline and transparency to the domestic foreign exchange derivatives market.
Point of View
Including a worked arithmetic example and an explicit anti-avoidance clause, signals that the central bank expects pushback from bank treasuries looking to arbitrage the $2 million threshold. The zero-interest condition on FERR deposits is a real cost that will be passed on to corporate hedgers, potentially widening bid-ask spreads on rupee derivatives. Notably, the carve-out for ECB interest and non-resident dividend payments is pragmatic — taxing those flows would have added friction to legitimate capital flows India needs. The deeper question is whether a reserve-based deterrent is the right tool for a market that needs deepening, not further cost addition.
NationPress
15 Oct 2026
Frequently Asked Questions
What is the RBI's Foreign Exchange Risk Reserve (FERR)?
The FERR is a 20 per cent reserve that authorised dealers must maintain against qualifying rupee foreign exchange derivative contracts. It applies to user contracts exceeding $2 million equivalent where the user buys foreign currency against the rupee to hedge current-account transactions.
How is the FERR amount calculated?
The FERR equals 20 per cent of the Indian rupee equivalent of the notional amount of each applicable contract. For example, a $10 million contract at ₹95 per dollar gives a notional of ₹95 crore, making the FERR ₹19 crore.
Which contracts are exempt from the FERR requirement?
Contracts involving the sale of foreign currency against the rupee, those hedging capital-account transactions, contracts not involving the Indian rupee, and current-account outflows arising from capital-account transactions (such as ECB interest, non-resident debt coupons, and dividends to non-residents) are all exempt under FEMA rules.
How must authorised dealers maintain the FERR?
The FERR must be deposited in the authorised dealer's current account with the RBI on a daily gross basis, starting from the working day after the contract is signed. It earns no interest and must be held until one day after the contract is terminated. Records are subject to audit.
Why has the RBI included an anti-avoidance warning in the FERR FAQs?
The RBI has cautioned authorised dealers to guard against structuring derivative transactions — for instance, splitting a large contract into sub-$2 million pieces — to avoid the FERR. The warning reflects concern that the $2 million exemption threshold could otherwise be exploited to reduce compliance costs.
