RBI Foreign Exchange Risk Reserve: What It Means for Importers' Working Capital
The RBI foreign exchange risk reserve, introduced on 10 October 2026, requires banks to keep 20% of the rupee value of each new forex hedge above USD 2 million in cash with RBI, where a business buys foreign currency for current account payments such as imports. It applies to contracts booked after the circular.
What is the RBI foreign exchange risk reserve?
On Saturday, 10 October 2026, the Reserve Bank of India issued two circulars to Authorised Dealer banks, A.P. (DIR Series) Circular No. 25 and No. 26. RBI said the measures were taken "in view of the evolving conditions and to ensure orderly functioning of the foreign exchange market". Together they change how Indian businesses hedge the rupee, and the most visible change is a new cash reserve on import-type hedges.
Here are the four measures, as stated in RBI's press release of 10 October 2026.
| Measure | What RBI announced | Applies from |
|---|---|---|
| Foreign Exchange Risk Reserve (FERR) | Banks keep 20% of the rupee value of each covered contract in cash with RBI, until the contract ends. Covers rupee forex derivatives above USD 2 million that hedge current account payments where the business buys foreign currency | Contracts booked after the circular was issued |
| Proof of underlying exposure | Limit for hedging contracted exposures without proving the underlying exposure cut from USD 100 million to USD 5 million, outstanding across all banks. Same cut for exchange-traded currency derivatives across all exchanges | Immediate effect |
| No rebooking after cancellation | Banks may not let a business rebook a rupee forex derivative contract once it has been cancelled with any bank. Rollovers on maturity are still allowed | Immediate effect |
| Extra undertaking | For every hedge of a contracted exposure, the business confirms in writing that the same exposure is not hedged with another bank, with details of any part booked elsewhere | Immediate effect |
RBI said the measures "are intended to strengthen market discipline and ensure appropriate risk management in the foreign exchange market". The reserve is held by the bank, not by the business. What reaches you is the way your bank prices and documents your hedges from now on.
Who does the reserve apply to, and who is outside it?
Circular No. 26 is narrow in scope, and the detail matters for your planning.
| Situation | Is the 20% reserve required? |
|---|---|
| Importer buys USD forward for a USD 3 million payment for goods | Yes: above USD 2 million, current account, business buys foreign currency |
| Importer hedges a USD 1.5 million payment | No: not above USD 2 million. Splitting one larger deal into smaller ones to stay under the limit is a violation |
| Exporter sells USD forward against export receivables | No: the business is selling foreign currency, not buying it |
| Business pays for imported services, such as software licences or freight, above USD 2 million | Yes, if hedged through a rupee derivative, since services are current account payments |
| Hedge of a foreign currency loan repayment | The circular covers current account transactions only and does not mention capital account hedges. Ask your bank how it reads this |
| Contracts booked before the circular was issued on 10 October 2026 | No: the reserve applies to contracts undertaken after the circular |
The reserve is per contract, on the full notional. Paragraph 3 of the circular means you cannot break a USD 4 million hedge into two USD 2 million deals. And the circular does not say the reserve earns interest, so the bank carries a cost for as long as the contract runs.
Are the new forex rules in force?
Yes. Circular No. 25 says its directions "shall come into force with immediate effect". Circular No. 26 applies to foreign exchange derivative contracts undertaken after it was issued on 10 October 2026. Contracts booked before then do not attract the reserve, but the rebooking ban applies to any contract cancelled after the directions were issued. Rollovers on maturity remain permitted under the Master Direction on Risk Management and Inter-Bank Dealings.
Three sentences sum up what changed on 10 October 2026:
- Under RBI's A.P. (DIR Series) Circular No. 26 of 10 October 2026, banks must keep 20% of the rupee value of each covered import hedge above USD 2 million in cash with RBI until the contract ends.
- RBI's Circular No. 25 of 10 October 2026 cut the limit for hedging contracted exposures without proving the underlying exposure from USD 100 million to USD 5 million, across all banks taken together.
- From 10 October 2026, RBI does not permit a business to rebook a rupee forex derivative contract once it has been cancelled, although rollovers on maturity remain allowed, according to Circular No. 25.
Why did RBI act now?
RBI's stated reasons were "evolving conditions" and the orderly functioning of the forex market. It gave no rupee target. The week's other RBI actions show the setting:
| Date | RBI action | Source |
|---|---|---|
| 7 October 2026 | Repo rate raised by 25 basis points to 5.50% | RBI MPC resolution, press release 2026-2027/1264 |
| 9 October 2026 | Minimum daily CRR maintenance raised from 90% to 99% of the requirement, from the fortnight beginning 16 October 2026 | RBI notification RBI/2026-27/290 |
| 9 October 2026 | OMO sale of government securities of ₹25,000 crore announced for 13 October 2026 | RBI press release 2026-2027/1301 |
| 9 October 2026 | 3-day VRRR auction of ₹2,00,000 crore announced for 12 October 2026 | RBI press release 2026-2027/1304 |
| 10 October 2026 | Special window to meet the entire daily dollar needs of three public sector oil marketing companies, from 12 October 2026 | RBI press release 2026-2027/1306 |
The FBIL reference rate shown by RBI was ₹96.6149 per US dollar at 1.00 pm on 9 October 2026. We use that rate in the examples below.
How could the RBI foreign exchange risk reserve affect an importer's working capital?
Through three channels: the cost of hedging, the cost of not hedging, and the size of your working capital need.
Worked example 1: the reserve on a USD 3 million hedge
Illustrative example, assuming an importer books a USD 3 million forward contract to pay a supplier, at the FBIL reference rate of ₹96.6149 per dollar on 9 October 2026, for a six-month tenor, and assuming the bank's cost of funds on the cash it parks is 6% a year.
| Item | Amount |
|---|---|
| Rupee notional of the contract | ₹28,98,44,700 (about ₹28.98 crore) |
| Reserve the bank keeps with RBI at 20% | ₹5,79,68,940 (about ₹5.80 crore) |
| Bank's carrying cost on the reserve for 6 months at an assumed 6% a year | ₹17,39,068 (about ₹17.39 lakh) |
| That cost as a share of the notional | 0.60% |
Formula: ₹28,98,44,700 x 20% x 6% x 6 / 12 = ₹17,39,068. This is the bank's cost, not a quoted price. No rule tells banks to pass it on, and each bank will price it its own way. On a large hedge, though, it can be big enough to move the forward price you are quoted.
Worked example 2: the cost of leaving a payment unhedged
If hedging gets dearer, some businesses may be tempted to hedge less. Here is what that exposes.
Illustrative example, assuming an importer pays USD 2,00,000 a month for raw material and does not hedge, starting from the FBIL reference rate of ₹96.6149 per dollar on 9 October 2026.
| Item | Amount |
|---|---|
| Monthly import bill at ₹96.6149 | ₹1,93,22,980 |
| Extra cost for every ₹1 the rupee weakens | ₹2,00,000 a month, ₹24 lakh a year |
| Extra cost if the rupee weakens 2%, to about ₹98.55 | ₹3,86,460 a month |
| Same 2% move over 12 months of payments | about ₹46.38 lakh |
A 2% move is an assumption for sizing, not a forecast. An unhedged import bill turns every currency move into a direct call on your cash credit (CC) or overdraft (OD) line.
Worked example 3: what a weaker rupee does to your drawing power
Drawing power is the amount you can actually draw from a CC limit, based on your stock and receivables less the lender's margin. Imported stock costs more rupees when the rupee weakens, so its book value rises.
Illustrative example, assuming ₹3 crore of imported stock rises 2% in rupee cost, and the lender applies a 25% margin on stock.
| Item | Amount |
|---|---|
| Rise in stock value | ₹6 lakh |
| Rise in drawing power after a 25% margin | ₹4.5 lakh |
| Share you fund from your own money | ₹1.5 lakh |
Drawing power can rise, but never by the full amount, and only up to your sanctioned limit. If you are already close to the limit, a weaker rupee squeezes you from both sides. See how banks calculate your working capital limit for the margin and MPBF maths.
What changes for documents and cancellations?
These two changes reach far more businesses than the reserve itself, because they have no USD 2 million floor.
Proof of exposure above USD 5 million
Until 10 October 2026, a business could hedge contracted exposures of up to USD 100 million outstanding without first proving the underlying exposure to the bank. That limit is now USD 5 million, counted across all banks together. Above it, expect to show the import contract, purchase order, proforma invoice or letter of credit before the bank books the hedge. Banks must keep these documents for at least two years, so expect them to ask up front.
The undertaking on every hedge
For every hedge of a contracted exposure, the bank must now take an undertaking that the same exposure is not hedged with another bank. If you split one exposure across two banks, the undertaking must show the amount booked with each. It can be part of the deal confirmation.
No rebooking after cancellation
This is the change most likely to catch businesses out. If you cancel a rupee forex derivative contract after 10 October 2026, no bank may let you rebook it. Rolling over a contract on maturity is still allowed. So before you cancel a hedge because a shipment is delayed or the rate has moved, check whether a rollover meets the need instead.
What about smaller importers and MSMEs?
If each of your contracts is USD 2 million or less, the 20% reserve does not apply to it. The rebooking ban and the undertaking still do. If your outstanding hedges across all banks exceed USD 5 million, the documentation rule applies too.
A weaker or more volatile rupee still raises the rupee value of every import payment, whatever its size. If your CC line funds imports, build the rupee rate into your working capital plan, not just your purchase price.
What about exporters?
The reserve does not apply when a business sells foreign currency, which is what an exporter usually does when it hedges receivables. Exporters are still bound by the rebooking ban, the USD 5 million documentation limit and the undertaking. Exporters who also import inputs should check each hedge separately: the import leg may fall under the reserve even if the export leg does not.
For exporters, receivables are the bigger working capital lever. Export invoices that sit unpaid for months tie up limit in the same way pending GST refunds do. Invoice discounting can turn approved receivables into cash. See invoice discounting vs factoring vs bill discounting for how the options compare.
Does this matter for real estate developers?
For some projects, yes. Lifts, facade glass, HVAC systems and some fit-out materials are often imported or priced in dollars. If a contractor's quote is linked to the exchange rate, a weaker rupee raises cost to complete, which lenders track before each tranche of construction finance. Ask your contractors whether their prices are fixed in rupees or linked to the dollar, and whether they hedge.
What should a business do now?
- List every open hedge and exposure. Note the amount, tenor, bank and whether each covers an import, an export, a service payment or a loan.
- Get the all-in cost before you book. Ask your bank for the forward rate and charges on any new import hedge above USD 2 million, now that the reserve applies.
- Do not cancel hedges casually. A cancelled contract cannot be rebooked. Check whether a rollover on maturity fits a delayed shipment.
- Keep documents ready. Import contracts, purchase orders, proforma invoices and LC copies will be needed above the USD 5 million limit, and the undertaking will be needed on every hedge.
- Do not split deals to dodge the reserve. RBI treats it as a violation of the directions.
- Stress test your working capital. Rerun your CC usage at a weaker rupee, such as 2% or 5% below today's rate, and check the headroom against your sanctioned limit and drawing power.
- Talk to your lender before you run out of room. A limit enhancement takes time. Combine this with the effect of the 7 October repo hike, covered in what the RBI repo rate hike means for your business loans.
This guide explains RBI's rules. It is not advice on whether or how to hedge. Take that decision with your bank's treasury team and your own adviser.
Which MoneyKarma products are most affected?
| Product | How the 10 October 2026 forex rules could affect it |
|---|---|
| Working capital (CC, OD) | Higher or more volatile rupee cost of imports raises CC usage; drawing power rises only after margin |
| Invoice discounting | Exporters and suppliers can turn receivables into cash while import costs absorb CC limit |
| Loan against property | Longer-tenor funding if a business needs permanent working capital, not a short-term bridge |
| Construction finance | Imported materials linked to the dollar can raise cost to complete |
For the basics of revolving credit lines, see cash credit vs overdraft.
How MoneyKarma helps
MoneyKarma is a loan distribution platform for Indian businesses and real estate developers, with 90+ lenders. Not a lender. If a weaker rupee or costlier hedging is stretching your working capital, we can help you compare CC and OD limits, invoice discounting and longer-tenor funding options across lenders. Our average response time is 24 hours, and we coordinate with the lender you choose. The lender makes the credit decision. We do not offer forex products or hedging advice. Share your requirement.
This guide is general information, not financial, legal, tax or hedging advice. Confirm how the rules apply to your contracts with your bank and adviser.