The Reserve Bank of India (RBI) introduced sweeping curbs on foreign exchange derivatives to suppress speculative trading as the Indian rupee dropped toward a historic low of 97 against the US dollar. The central bank slashed the threshold for undertaking currency derivative transactions without establishing underlying commercial exposure. Under the revised framework, the unhedged limit fell from $100 million to just $5 million across authorized dealer banks.
The central bank applied the same stringent reduction to exchange-traded currency derivatives (ETCD) across all recognized stock exchanges. Consequently, traders and market participants can no longer build massive derivative positions without proving genuine trade or debt obligations. According to regulatory details reported by The Indian Express, the massive 95 percent cut aims to eliminate speculative bets that artificially drive up dollar demand and trigger currency volatility.
Complete Ban on Rebooking Cancelled Forex Contracts
To prevent corporate treasuries from exploiting day-to-day market fluctuations, the central bank prohibited the rebooking of cancelled rupee derivative contracts. Authorized dealers must no longer allow clients to re-enter forward or option positions once they cancel an existing contract. While market participants retain the freedom to roll over contracts upon scheduled maturity, they lose the ability to cancel and rebook to capture quick exchange-rate swings.
Treasury analysts noted that aggressive cancellations previously allowed speculators to switch positions as exchange rates shifted. However, the new ban closes this loophole and forces companies to exercise stricter discipline before locking in contracts. Furthermore, corporate finance desks must now sharpen cash-flow forecasting and work closely with banking partners, ensuring that foreign exchange bookings reflect bona fide commercial payments rather than market speculation.
20% Cash Reserve Mandated for Currency Hedges
In an unprecedented move to increase the cost of dollar buying, the RBI unveiled a new Foreign Exchange Risk Reserve (FERR). Authorized dealer banks must now deposit 20 percent of the rupee value in cash with the central bank for covered derivative transactions exceeding $2 million. This requirement directly covers contracts used by importers and domestic entities purchasing foreign currency to hedge current-account liabilities.
By locking up 20 percent in cash reserves, the regulator substantially raises the funding costs for commercial banks offering large forward covers. Therefore, banks may pass part of these liquidity expenses to clients, making speculative forward accumulation significantly more expensive. In addition, the capital requirement acts as a structural speed breaker, discouraging unnecessary dollar hoarding across corporate balance sheets.
Strict Undertakings to Prevent Double-Hedging
The banking regulator also moved aggressively to eliminate duplicate hedges, where companies used single commercial invoices across multiple financial institutions. Banks must now collect and maintain a binding written declaration from corporate clients before executing any rupee derivative trade. The customer must certify that they have not hedged the underlying invoice, contract, or exposure with any other authorized dealer.
This mandatory declaration places legal and operational responsibility directly on corporate treasurers. Meanwhile, banks face higher scrutiny to audit documentation and verify cross-institutional exposure declarations. Moreover, by removing duplicate positions from the system, the central bank ensures that daily interbank volumes reflect actual economic transactions rather than multiplied financial wagers.
Macroeconomic Pressures and Special Oil Window
The aggressive intervention comes as external financial headwinds batter the domestic currency. The rupee closed near 96.73 per US dollar on Friday despite a recent 25-basis-point policy rate increase by the Monetary Policy Committee. Meanwhile, international crude oil prices crossed $100 per barrel, swelling India’s monthly import bill and widening the trade deficit. India’s foreign exchange reserves also declined by $12.95 billion to $734.60 billion during the week ended October 2.
To relieve direct pressure on the interbank market, the RBI simultaneously created a dedicated foreign exchange window for state-run oil marketing companies. As detailed by The Indian Express Business, this facility enables oil refiners to procure greenbacks directly from the central bank rather than bidding in open spot markets. On the other hand, the parallel crackdown on derivatives ensures that speculative currency traders cannot exploit external shocks to push the rupee past the psychological barrier of 97.
Curated news reports, in-depth analysis, and special features by India’s Opinion editorial team.
