The Reserve Bank of India has narrowed the permitted purpose for INR-linked non-deliverable derivative contracts offered to non-resident users. It has also introduced a 20% cash Foreign Exchange Risk Reserve for specified INR foreign-exchange derivatives undertaken by authorised dealers for their own asset and liability risks.
BKK Bureau, New Delhi | 17 October 2026 | 12:27 PM IST
The Reserve Bank of India has changed the rules governing certain INR-linked non-deliverable derivative contracts offered to non-resident users. Under its October 12, 2026 circular, authorised dealers may offer these contracts to non-residents only for hedging purposes, replacing the earlier provision that allowed them without a restriction based on purpose.
The change applies to Authorised Dealer Category-I banks that have an operating International Financial Services Centre Banking Unit, as well as standalone primary dealers authorised as Authorised Dealer Category-III. The RBI issued the directions under the framework governing risk management and inter-bank dealings.
The circular refers to non-deliverable derivative contracts involving the Indian rupee. It states that, following a review, authorised dealers covered by the provision must limit such contracts for non-resident users to hedging. The direction therefore specifies the permitted purpose for these transactions rather than allowing them on an unrestricted-purpose basis.
The RBI has also introduced a Foreign Exchange Risk Reserve requirement for authorised dealers. The reserve will apply when an authorised dealer undertakes foreign-exchange derivative contracts involving the rupee to hedge the currency risk of its own assets and liabilities.
The requirement covers all foreign-exchange derivative contracts involving INR in which the authorised dealer purchases foreign currency against the rupee. For each such derivative contract, the Foreign Exchange Risk Reserve must equal 20% of the INR equivalent of the contract’s notional amount.
The reserve must be deposited and maintained in cash in India with the Reserve Bank on a daily basis. It must remain in place until the relevant derivative contract is terminated. The circular specifies that the requirement applies to foreign-exchange derivative contracts involving INR undertaken after the issuance of the directions.
The RBI’s circular is issued under powers provided by Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999, and Section 45W of the Reserve Bank of India Act, 1934. It also states that the directions are without prejudice to any permissions or approvals that may be required under other laws.
The directions amend the operating framework contained in the RBI’s Master Direction on Risk Management and Inter-Bank Dealings, dated July 5, 2016, as amended from time to time. The circular was addressed to all authorised dealers and signed by Dimple Bhandia, Chief General Manager, RBI.
Why it matters
The circular changes the compliance requirements for the specified authorised dealers and transactions. Non-resident users must use the covered INR non-deliverable derivatives for hedging, while authorised dealers undertaking specified proprietary hedging contracts must maintain cash with the RBI equal to 20% of each contract’s INR-equivalent notional amount until termination.
Why it matters
The directions impose a defined hedging-purpose condition on covered INR non-deliverable derivatives for non-residents and create a daily cash-reserve obligation for specified authorised-dealer contracts.
Source: Reserve Bank of India
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