RBI Slashes No-Underlying Forex Derivative Limit to USD 5 Million, Bans Rebooking of Cancelled Rupee

India's central bank has sharply tightened the rules for trading rupee-linked foreign exchange derivatives, cutting the amount of such trading allowed without proof of an underlying exposure and banning the rebooking of cancelled contracts.

The measures, announced in two circulars dated 10 October 2026, took effect immediately and leave banks and companies with no transition period to adjust.

Contents

01

What the RBI Changed

02

How the Reserve Works and Who It Hits

03

Timing and the RBI's Stated Rationale

04

What It Means for Companies and Banks

What the RBI Changed

The Reserve Bank of India issued A.P. (DIR Series) Circular No. 25 (RBI/2026-27/291) and Circular No. 26 (RBI/2026-27/292) on 10 October 2026, according to a compliance analysis published by CorpLawUpdates.in.

The circulars reset thresholds that operate under the Master Direction on Risk Management and Inter-Bank Dealings dated 5 July 2016, as amended from time to time. The analysis notes that the circulars do not themselves say they amend the Master Direction.

The first change cuts the threshold for taking positions in rupee foreign exchange derivatives without establishing an underlying exposure from USD 100 million to USD 5 million equivalent. This applies both to hedging contracted exposure across all Authorised Dealers and to exchange-traded rupee positions across all Recognised Stock Exchanges together.

In simple terms, an underlying exposure is a real business need for foreign currency, such as an import bill or an export receipt. A derivative is a contract whose value is linked to an asset, here the rupee's exchange rate.

Previously, a user could take a position of up to USD 100 million without proving such a need; now that ceiling is USD 5 million.

The second change bars Authorised Dealers from permitting users to rebook any rupee foreign exchange derivative contract, deliverable or non-deliverable, that has been cancelled with any Authorised Dealer after the issuance of the Directions.

A deliverable contract settles in actual currency, while a non-deliverable forward, or NDF, settles in cash because the currency is not freely traded offshore. Rebooking means entering a new contract after cancelling an earlier one, often to lock in a better rate. Rollover of contracts on maturity continues to be permitted, subject to the Master Direction.

The third change requires Authorised Dealers to obtain and retain an undertaking from users that the same underlying exposure has not been hedged with another Authorised Dealer. If the exposure is hedged in parts, the undertaking must include details of amounts booked elsewhere.

The fourth change requires Authorised Dealers to maintain a Foreign Exchange Risk Reserve, or FERR, in cash with the Reserve Bank, equal to 20% of the rupee equivalent of the notional, for rupee contracts above USD 2 million equivalent undertaken to hedge current account transactions where the user is purchasing foreign currency against the rupee.

Notional is the face value on which a derivative is based, not the amount actually paid upfront.

How the Reserve Works and Who It Hits

The FERR is a cash reserve equal to 20% of the rupee notional of a qualifying foreign exchange derivative contract, which Authorised Dealers must deposit and maintain with the RBI daily until the contract terminates.

They report details of the FERR maintained on a daily basis through the RBI's Centralised Information Management System, or CIMS.

The reserve applies to rupee foreign exchange derivative contracts with users of notional value exceeding USD 2 million equivalent undertaken to hedge current account transactions where the user purchases foreign currency against the rupee.

Current account transactions broadly cover trade in goods and services, as opposed to capital flows such as loans or investments.

The no-underlying threshold is USD 5 million equivalent of notional value outstanding at any time. It was USD 100 million for both over-the-counter hedging across Authorised Dealers and exchange-traded rupee positions across Recognised Stock Exchanges.

Over-the-counter means trades arranged directly between parties rather than on an exchange.

Under para 3 of Circular No. 26, any attempt by users to circumvent the requirements in para 2(ii), meaning the USD 2 million notional threshold and the scope of hedging current account transactions where the user purchases foreign currency against the rupee, through multiple transactions with one or more Authorised Dealers is considered a violation of the Directions.

The circulars state no separate penalty. The circulars are issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 and Section 45W of the RBI Act, 1934, and are without prejudice to permissions or approvals required under any other law.

Timing and the RBI's Stated Rationale

Both circulars were issued and came into force with immediate effect on 10 October 2026. From that date, the rebooking ban applies to contracts cancelled after the circular is issued, and the USD 5 million thresholds and the undertaking requirement apply.

There is no transition period. The FERR must be deposited and reported through CIMS daily.

Press release 2026-2027/1305 says the measures follow evolving conditions and are intended to ensure orderly functioning of the foreign exchange market, strengthen market discipline and ensure appropriate risk management.

The package arrives three days after the 7 October monetary policy, where the Governor said the RBI is committed to orderly exchange rate adjustments and curbing excessive volatility. CorpLawUpdates.in notes that the circulars themselves cite only evolving market conditions and orderly functioning of the market, so any link to the rupee is its own reading, not an RBI statement.

What It Means for Companies and Banks

For corporate treasuries, the immediate issue is documentation, according to CorpLawUpdates.in. Positions to hedge a contracted exposure above USD 5 million equivalent now need the underlying exposure established, and the no-duplicate-hedge undertaking applies to rupee derivative contracts offered to hedge a contracted exposure, with no size threshold stated in the circular.

Users hedging current account purchases of foreign currency above USD 2 million may see higher quotes because dealers must lock up cash, the analysis says. Banks need daily FERR processes and CIMS reporting in place at once. These are editorial views, not RBI statements.

The measures sit within a broader run of foreign exchange rule changes. RBI's 22 September 2026 notification amends FEMA 23(R)/2026, cutting the regulation 5(1) timeline from fifteen to nine months and its proviso from eighteen to twelve months, preserving Caution List orders, and empowering Authorised Dealers to process pre-October 2026 export and import approvals.

RBI's 8 September 2026 circular withdraws seven A.P. (DIR Series) circulars under FEMA, 1999, including five on External Commercial Borrowings, one on Money Transfer Service Scheme sub-agents, and one on rupee borrowing by non-residents, as part of an ongoing review of circulars issued since June 2000.

On 21 July 2026, RBI released draft Foreign Exchange Management (Foreign Investment) Rules, 2026, proposing to replace the Non-Debt Instruments Rules, 2019 with a simplified, principle-based framework for foreign direct and portfolio investment, with comments due 31 August 2026.

The supplied material does not include the circular texts, the RBI press release, or any market data on rupee levels, hedging volumes, NDF pricing or onshore-offshore spreads. As a result, the exact wording of the circulars and any market reaction cannot be independently confirmed here, and no market impact is quantified.

The source also does not detail how non-resident or offshore participants are treated beyond the general rebooking ban covering deliverable and non-deliverable contracts, and no penalty schedule is specified in the circulars.