Reserve Bank of India Clarifies Currency Hedging Reserve Rules

The Reserve Bank of India issued clarifications regarding the Foreign Exchange Risk Reserve (FERR) requirement to address market concerns over currency hedging curbs. The FERR applies to specific derivatives where authorized dealers facilitate the purchase of foreign currency against the rupee for users hedging current account exposures, provided the contract's notional value exceeds $2 million.

Under these rules, the reserve is set at 20% of the rupee equivalent of the notional value. This amount must be deposited daily into the dealer's current account with the central bank and will not earn interest. Authorized dealers are required to report FERR details daily via the Centralised Information Management System.

Certain transactions are exempt from the requirement, including those with a notional value of $2 million or less, derivatives for capital account transactions, and market-making activities. The bank also excluded specific current account outflows arising from capital account transactions, such as dividends to non-residents and interest payments on external commercial borrowings.