Executive Summary 

The Reserve Bank of India (RBI) issued A.P. (DIR Series) Circular No. 27, significantly tightening the regulatory framework for foreign exchange derivatives. The RBI now mandates a 20% cash Foreign Exchange Reserve Requirement (FERR) on the INR equivalent of the notional amount of derivative contracts. This daily cash maintenance requirement alters the cost dynamics of corporate hedging in India.

Background 

Indian currency markets periodically experience heightened volatility driven by speculative positioning. Previously, corporate entities could leverage significant unbacked derivative limits with minimal margin drags. To anchor the derivatives market closer to genuine underlying trade exposures and eliminate systemic leverage risks, the RBI intervened with strict cash reserve mandates.

What Has Changed

Particulars Earlier Position Revised Position (Circular No. 27)

Derivative Margin Rules Governed by standard AD Bank credit/margin policies Mandatory 20% FERR strictly in Cash

Maintenance Frequency Based on specific contract terms Maintained on a daily mark-to-market basis

Key Provisions

• Cash FERR Implementation: A Foreign Exchange Reserve Requirement (FERR) equal to 20% of the INR equivalent of the contract's notional amount must be maintained.

• Daily Maintenance: The FERR must be deposited in cash and maintained with the Reserve Bank daily until contract termination.

• Contract Scope: Applies to OTC and exchange-traded foreign exchange derivatives utilized by corporate hedgers.

Applicability

• Covered Entities: Corporate treasuries, importers, exporters, and proprietary traders utilizing foreign exchange derivatives.

• Intermediaries: Authorised Dealer (AD) Category-I Banks and clearing corporations.

Practical Implications

• Working Capital Drain: The 20% cash mandate introduces a massive liquidity drag, locking up significant funds from the company's operational cycle.

• Hedging Costs: The cost of hedging will rise significantly as treasuries factor in the opportunity cost of parked cash.

• Risk Management: Treasuries will be forced to align their derivative books strictly with highly probable, invoice-backed underlying exposures.

What Should We Do

1. Audit Derivative Portfolios: Compute the FERR cash requirement for all open and planned forward contracts, options, and swaps immediately.

2. Revise Treasury Policies: Update internal risk management policies to reflect the increased cost of hedging.

3. Liquidity Planning: Allocate dedicated liquid cash reserves specifically to satisfy daily FERR requirements to prevent regulatory breaches.

KGS Perspective 

The RBI’s aggressive pivot toward cash FERR shifts the market from a credit-based derivative ecosystem to a strictly collateralized one. CFOs must urgently rethink hedging strategies, prioritizing structural business hedges over financial engineering to conserve liquidity.

Conclusion 

Circular No. 27 profoundly shifts the economics of forex hedging in India, ensuring that only participants with genuine risk-mitigation needs and deep liquidity buffers engage in the derivatives market.

Regulatory Reference

• Regulator: Reserve Bank of India (RBI)

• Notification / Circular / Regulatory Reference: A.P. (DIR Series) Circular No. 27 (RBI/2026-27/293) [Dated 12 October 2026]

• Official Document Link: https://www.rbi.org.in