Under the Foreign Exchange Risk Reserve (FERR) framework, banks must maintain a cash reserve with the RBI equivalent to 20 per cent of the rupee value of specified derivatives transactions exceeding $2 million. Lenders have proposed replacing the requirement with an additional charge on clients, Reuters reported on Monday.
Banks have also sought the removal of the $2 million threshold, warning that it could encourage clients to split larger hedging transactions into smaller deals to avoid the reserve requirement. They have said such practices would be difficult to monitor.
“Fedai is taking it up because it is the self-regulated organisation and an industry body representing all the banks, to discuss with the RBI so that the whole industry has the same practices,” said a senior banker with a state-owned bank.
The discussions follow the RBI’s October 10 measures to curb speculative activity and excessive trading in rupee-linked forex derivatives, as the currency faces pressure from elevated crude oil prices and capital outflows.
State Bank of India said in a report that the reserve requirement, along with the other measures, could drain more than ₹1 trillion from the banking system over a longer period. The bank estimated that the FERR alone could require around ₹80,000 crore in reserves against fresh contracts on a rolling basis. This estimate assumes that monthly notional merchant forward sales remain at the 2026-27 average of $46.94 billion so far, that 10 per cent of the notional value falls below the $2 million threshold, and that the exchange rate is ₹95 per dollar.
“RBI’s swift move to cap the currency derivatives position from $100 million to $5 million and restricting corporates to rebook cancelled forward contracts, appears more aligned to ‘cutting the crap’ surreptitiously stitched in currency movement. There should definitely be a marked drop in activities in non-deliverable forward market but much of this will ultimately depend on the risk drivers affecting the global markets and how emerging market currencies gyrate against a nonchalant greenback,” the report said.
The broader objective of the measures is to discourage speculative positions and excessive turnover, including transactions booked and then cancelled or rolled over to profit from currency volatility, rather than to restrict genuine hedging against underlying trade exposures. The measures are intended to ease the additional pressure on the rupee from such activity, but would not address the underlying demand for dollars driven by higher crude oil prices and global financial conditions, bankers said.
The RBI has also introduced a dedicated dollar supply window for the three state-run oil-marketing companies, routing their dollar requirements through the central bank instead of the spot market. This could reduce the immediate impact of large oil-related dollar purchases on the exchange rate, although it would not lower the country’s overall oil import bill.
 "Reserve Bank of India, RBI")