The Reserve Bank of India has imposed a 20% foreign exchange risk reserve on non-deliverable INR derivative contracts exceeding USD 2 million, requiring daily cash deposits and strict reporting by authorized dealers.
RBI Imposes 20% Risk Reserve on INR Derivatives for Non-Residents
The Reserve Bank of India (RBI) has introduced a 20% foreign exchange risk reserve requirement for specified non-deliverable Indian rupee (INR) derivative contracts entered into by non-residents, effective 14 October 2026. The measure applies to contracts exceeding a notional value of USD 2 million, aiming to curb speculative activity in offshore INR markets.
Under the new framework, counterparties must maintain the risk reserve in cash on a daily basis, computed as 20% of the gross outstanding position in covered derivatives. Authorized Dealer (AD) banks are mandated to report these positions to the RBI through the prescribed reporting mechanism. The restriction specifically limits the use of such derivatives to hedging permissible exposures, disallowing purely speculative trading by overseas investors.
Regulatory Context and Market Impact
The move aligns with the RBI’s broader strategy to enhance financial stability and manage capital flow volatility. By discouraging large unhedged positions, the central bank seeks to reduce the risk of abrupt exchange rate movements triggered by derivative-induced sell-offs. Market participants, especially foreign portfolio investors and offshore financial centers, must reassess their hedging strategies and ensure compliance with the reserve and reporting obligations. Failure to comply may attract penalties under the Foreign Exchange Management Act (FEMA), 1999.
Citations
- Foreign Exchange Management Act, 1999