RBI’s rupee-hedging reserve puts a cash cost behind larger derivative trades

India’s authorised foreign-exchange dealers must treat qualifying hedge rollovers as fresh contracts for the Foreign Exchange Risk Reserve. The Reserve Bank of India’s 15 October FAQ also confirms that the cash earns no interest, clarifying a funding cost that dealers must finance alongside the underlying trade.[2]

The original 10 October direction requires dealers to place cash at the RBI equal to 20% of a qualifying contract’s rupee-equivalent notional. The customer-side rule covers INR derivatives above US$2 million equivalent used to hedge current-account transactions where the customer buys foreign currency. Splitting transactions across dealers to evade the requirement is prohibited.[1]

A qualifying ₹500 million notional contract therefore requires ₹100 million of dealer cash at the RBI. The commercial cost depends on how long that cash is tied up and how the dealer funds it. The 20% ratio specifies the reserve amount; it does not set a 20% customer commission.[1]

The FAQ requires the reserve from the following working day until a day after termination. Dealers must report through the RBI’s CIMS system by 5 p.m. on the next working day. Pre-direction contracts are outside scope until a qualifying rollover creates a fresh transaction.[2]

A separate 12 October direction extends the reserve to dealers buying foreign currency against INR to hedge their own assets and liabilities. It also restricts INR non-deliverable derivatives offered to non-residents to hedging purposes. These provisions affect the dealer’s own balance-sheet management as well as the products it can offer overseas clients.[3]

The FAQ excludes dealer market-making and proprietary positions from that own-hedge provision. Customer hedges of capital-account transactions, and certain associated payments such as loan interest and dividends, are also excluded from the customer-side reserve rule. Classifying the exposure correctly is consequently central to applying the reserve requirement to the right trades.[2]

Deal documentation has tightened alongside funding. Circular 25 reduces the threshold for positions without establishing the underlying exposure from US$100 million to US$5 million, across dealers and, separately, recognised exchanges. It requires an undertaking about hedges booked elsewhere and bars rebooking cancelled INR contracts, while allowing maturity rollovers. For treasury platforms, reserve calculations and evidence of the underlying exposure now need to travel with the same transaction record.[4]

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