RBI Slashes Unhedged Derivative Cap to $5 Million to Quash Speculative Dollar Bets
The Reserve Bank of India (RBI) has initiated one of its most stringent currency intervention packages to combat rampant dollar accumulation and speculative derivative trading that dragged the rupee near the record threshold of 97 against the US dollar.
The central bank's decisive moves follow surging demand in the forward markets, where Indian importers and traders accumulated record currency covers. Clearing Corporation of India data revealed that forward dollar purchases climbed to an average of $64 billion per month, up 44% from 2025 levels, before peaking at $76.8 billion in September. The persistent hedging activity outpaced exporter dollar sales of $41.3 billion, creating a self-fulfilling loop of currency depreciation despite prior interest rate hikes and substantial spot market interventions.
RBI Governor Sanjay Malhotra observed that currency derivatives were increasingly dominated by speculative trades, noting that foreign exchange markets were turning unduly pessimistic.
Key Regulatory Measures Imposed by the Central Bank:
- Drastic Cut in Unhedged Threshold: The ceiling for undertaking foreign exchange derivative contracts without proving an underlying exposure was cut by 95%, falling from $100 million to just $5 million across authorized dealers and recognized stock exchanges.
- Foreign Exchange Risk Reserve (FERR): Banks are now required to set aside a 20% cash reserve against eligible forex derivative contracts exceeding $2 million, locking capital that cannot be utilized for active lending.
- Ban on Rebooking Cancelled Contracts: The regulator prohibited the rebooking of cancelled rupee-linked derivative contracts to eliminate circular arbitrage, though standard rollovers at maturity remain permitted.
- Strict Documentation Mandates: Commercial banks must enforce stringent verification procedures to ensure that the identical underlying transaction is not hedged multiple times across different authorized dealers.
- Dedicated Oil Window: The RBI opened an exclusive dollar facility for three state-run oil marketing companies, effectively shifting an estimated $10 billion to $12 billion in monthly dollar demand away from the open interbank spot market.
Impact on Corporate Treasuries and Hedging Costs
While the regulatory offensive provided immediate relief to the spot exchange rate—pulling USD/INR back toward the 95.80 handle from 96.71—it has reshaped derivative pricing and market liquidity.
Market participants highlight that the 20% cash reserve requirement directly increases funding burdens on commercial banks. Lenders are passing these capital costs on to clients, raising the cost of hedging by an estimated 1.3% to 1.5%, with long-tenor contracts bearing the greatest brunt.
Treasury desks warn of unintended consequences. Smaller importers and businesses facing stricter documentation burdens and elevated forward premiums may opt to leave foreign currency payables unhedged, creating unshielded balance sheet risks should macroeconomic headwinds re-emerge. Meanwhile, the Foreign Exchange Dealers' Association of India (FEDAI) and member institutions continue to assess the broader implications for onshore market liquidity as financial institutions unwind proprietary speculative positions.
