RBI restricts non-deliverable INR derivatives to hedging purposes and imposes 20% foreign exchange risk reserve on specified contracts.
Effective 1 October 2026, the Reserve Bank of India has amended the Foreign Exchange Management (Derivatives) Regulations, restricting non-deliverable forward (NDF) contracts in Indian Rupees for non-residents exclusively to hedging of underlying exposure. Speculative positions in offshore INR derivatives are now prohibited unless linked to demonstrable trade or investment flows.
New Risk Reserves and Reporting
In addition, a 20% cash risk reserve in foreign currency is mandated for all new NDFs exceeding $1 million, applicable for six months from contract initiation. This measure aims to deter excessive speculation and reduce systemic vulnerability to sudden capital outflows. Authorised Dealers (ADs) must report all such contracts to the Central Repository within 48 hours of execution.
The framework seeks to balance market access with macroprudential stability, ensuring INR derivatives serve economic hedging rather than speculative arbitrage.
Compliance for Offshore Funds
Practitioners must advise foreign portfolio investors and hedge funds that synthetic exposure to INR via offshore swaps will face tighter scrutiny. Hedging claims must be backed by auditable asset/liability positions. The changes align with IMF’s recommendations on capital flow management and may influence future FX policy, including potential onshore derivative market liberalisation.
Citations
- FEMA (Derivatives) Regulations, 2026, Notification No. FEMA/2026/RBI
