Banks Halt USD/INR Interbank Forward Quotes as RBI Widens Scope of Forex Risk Reserve — October 13, 2026

Interbank liquidity in the domestic foreign exchange market faced sudden friction as several authorized dealer banks paused quoting USD/INR forward rates. The disruption followed regulatory directives from the Reserve Bank of India (RBI) that expanded the scope of a newly introduced Foreign Exchange Risk Reserve (FERR), prompting institutional treasury desks to retreat until legal and compliance terms are clarified.

The central bank initially introduced the FERR framework on October 10, 2026. Under the initial directive, Authorized Dealer Category-I banks were required to deposit an interest-free cash reserve of 20% with the RBI against eligible rupee-linked foreign exchange derivative contracts exceeding $2 million. The requirement specifically targeted current-account hedging where users purchased foreign currency against the Indian rupee.

On October 12, 2026, the RBI issued a subsequent circular extending the 20% cash reserve mandate to derivative contracts undertaken by banks themselves to hedge the currency risk of their own balance sheet assets and liabilities. The central bank also restricted authorized dealers from offering non-deliverable derivative contracts (NDDCs) to non-residents except strictly for hedging purposes.

Key Factors Behind the Market Disruption

• Broad Interpretation of Cash Margins: Several bank treasury desks feared that the cash reserve rule could be interpreted expansively to encompass interbank forward dealing and balance sheet market-making, raising the risk of locking up massive capital in non-yielding cash deposits.
• Liquidity Freeze: Uncertainty over how the 20% cash debit would be executed led at least seven banks to temporarily withhold two-way quotes in the interbank forward market, widening bid-ask spreads.
• Operational Ambiguity: Dealing desks flagged confusion over calculating notional values in multi-leg options, cross-currency swaps, and external commercial borrowing (ECB) structures.

Regulatory Intent and Industry Response

While bank treasuries pulled back, sources familiar with the central bank’s policy stance noted that the cash reserve requirement was intended for client hedging and banks' balance sheet asset-liability covers, not standard interbank market-making or trading books. Historically, market-making transactions are excluded to preserve price discovery and liquidity.

The banking sector has approached the central bank via the Foreign Exchange Dealers’ Association of India (FEDAI) seeking formal clarification through Frequently Asked Questions (FAQs).

Implications for Indian Markets and Importers

The RBI's clampdown comes amid broader efforts to curb speculative pressures on the rupee, which traded near historic lows of 96.78 per dollar. Alongside the reserve mandate, the central bank banned the rebooking of cancelled rupee derivative contracts, slashed the threshold for hedging without underlying exposure from $100 million to $5 million, and established a dedicated dollar sales window for state-run oil refiners.

According to treasury analysts, the cash lockup under FERR could withdraw approximately ₹45,000 crore to ₹50,000 crore from the banking system if activity remains constrained. For corporate India, particularly importers, forward dollar hedging costs are projected to climb by 130 to 150 basis points on longer-tenor contracts, forcing finance teams to reassess cash flow projections and FX hedge ratios until normal quoting resumes.

Tags: Reserve Bank of India FEDAI USD/INR Banking Sector Foreign Exchange Market