RBI limits non-deliverable INR derivatives for non-residents to hedging; mandates 20% FX risk reserve on specified contracts.
RBI Tightens Rules on Non-Resident INR Derivatives
The Reserve Bank of India has restricted non-deliverable foreign currency-INR derivative contracts (NDFs) for non-residents to hedging purposes only, eliminating speculative trading. Additionally, a 20% cash foreign exchange risk reserve (FRR) is mandated on specified NDF contracts to curb volatility.
The move aims to reduce currency speculation and protect macroeconomic stability. Only entities with underlying exposure to INR—such as trade payables, receivables, or investments—can now enter such contracts. Trading platforms and overseas exchanges must enforce eligibility checks.
Key Regulatory Changes
- Speculative NDF trading in INR prohibited for non-residents
- 20% FRR required in permitted NDFs, payable in foreign currency
- Hedging eligibility to be certified by Authorised Dealer banks
- Retroactive reporting for past unsettled speculative positions
These measures strengthen capital account management. Financial institutions and hedge funds must reassess their offshore INR strategies. The FRR requirement increases cost for speculative positions, aligning with RBI’s long-term objective of minimizing external vulnerabilities.
