India's central bank imposes 20% reserve requirement on currency contracts to support rupee
Key Facts
The Reserve Bank of India imposed a foreign exchange risk reserve equivalent to 20% of the rupee equivalent of the notional value of eligible derivatives contracts as part of measures to support the local currency. The circular, dated 10 October, covers contracts to buy foreign currencies against the rupee to hedge current account transactions. The requirements apply when a contract's notional value exceeds the equivalent of $2 million, according to the central bank's circular. In parallel, the bank allowed oil marketing companies to buy dollars directly from it through a special window, Reuters reported. The window aims to ease pressure on the rupee from these companies' demand for the U.S. currency.
The circular requires the foreign exchange risk reserve to be deposited in cash with the central bank and maintained daily until the contract subject to the requirements expires. Clarifications reported by Business Standard confirmed that this reserve is held in addition to banks' mandatory cash reserve balance. The newspaper added that funds deposited with the central bank under these rules earn no interest, adding to hedging costs. The circular prohibits splitting transactions to circumvent the reserve requirements and treats this as a regulatory violation. The ban applies whether the split transactions are executed with a single authorised dealer or spread across several dealers, according to the central bank.
The measures came as companies' forward dollar purchases rose to a record in September, according to clearing data cited by Reuters. Those purchases totalled $77 billion, up 80% year on year, compared with corporate forward dollar sales of $41 billion during the same month. The reserve requirements cover eligible contracts to hedge current account transactions, bringing legitimate trade hedging within their scope as well. By contrast, a banker who spoke to Reuters said the requirement does not cover capital account transactions. Exempt transactions include hedging foreign investments in equities and debt instruments, as well as repayment of external borrowing principal, according to the banker.
Bankers who spoke to Reuters estimated that the measures could raise hedging costs by 80–150 basis points. The size of the increase borne by clients depends on how much of the cost banks pass on to them, according to the bankers' estimates. On trading activity, Business Standard reported in an article published on 13 October that some banks had temporarily stopped quoting dollar purchase contracts for clients. The newspaper attributed this to uncertainty over how the new reserve requirements would apply to the contracts. Those banks suspended quotes as the rupee continued to recover, according to the same report.
An analyst at HDFC Securities attributed the rupee's recovery to regulatory measures and the unwinding of positions, according to Business Standard. The analyst added that dollar weakness, lower oil prices and gains in domestic equities also contributed to the Indian currency's recovery. On foreign trade, the Ministry of Commerce and Industry said merchandise exports totalled $44.40 billion in September 2026. The ministry compared that with exports of $36.08 billion in September 2025, according to its statement published through the government's Press Information Bureau. The trade data were released on 15 October, after the foreign exchange risk reserve circular dated 10 October.
On monetary policy, the Monetary Policy Committee unanimously raised the repo rate by 25 basis points to 5.50% at its October meeting. The committee changed its policy stance to "calibrated tightening," according to the Reserve Bank of India's statement. The bank said in the statement that "a rate cut is ruled out in the near term." The new stance leaves the committee with a choice between raising rates and holding them unchanged, depending on how conditions evolve. The policy statement set 21 October 2026 as the date for publication of the meeting minutes. The committee's next meeting is scheduled for 2 to 4 December 2026, according to the central bank's announced calendar.