The Reserve Bank of India (RBI) has clarified the applicability, calculation, maintenance and reporting requirements of the Foreign Exchange Risk Reserve (FERR) through its latest directions and frequently asked questions (FAQs). The framework covers specified rupee-involving foreign exchange derivative contracts undertaken by Authorised Dealers (ADs) with users, as well as certain derivative contracts entered into by banks to hedge their own currency risks.
The clarifications follow A.P. (DIR Series) Circular No. 26 dated October 10, 2026, and Circular No. 27 dated October 12, 2026. The RBI has specified when the reserve must be maintained, how the threshold is determined, the treatment of options and rolled-over contracts, and the reporting timelines applicable to Authorised Dealers.
What Is the Foreign Exchange Risk Reserve (FERR)?
The Foreign Exchange Risk Reserve is a reserve that Authorised Dealers are required to maintain with the RBI against specified foreign exchange derivative contracts involving the Indian rupee.
The requirement applies to two broad categories:
- Derivative contracts with users: Specified contracts in which a user purchases foreign currency against the Indian rupee for hedging current account transactions, subject to the prescribed conditions and threshold.
- Banks' own currency risk hedging: Derivative contracts undertaken by an Authorised Dealer to hedge currency risks arising from its own assets and liabilities, where the dealer purchases foreign currency against the Indian rupee.
The RBI has also clarified that FERR does not apply to every foreign exchange transaction. Its applicability depends on the nature of the contract, the direction of the currency transaction, the purpose of hedging and the applicable notional-value threshold.
Which Derivative Contracts Attract the FERR Requirement?
For derivative contracts undertaken by Authorised Dealers with users, the FERR requirement applies when all the following conditions are satisfied:
- The derivative contract involves the Indian rupee.
- The contract is undertaken between an Authorised Dealer and a user.
- The user purchases foreign currency against the Indian rupee.
- The notional value of the contract exceeds the equivalent of USD 2 million.
- The contract is entered into to hedge a current account transaction.
Contracts that do not satisfy these conditions are not covered by this particular requirement, subject to the RBI's separate clarification for Authorised Dealers hedging their own currency risks.
When Does FERR Not Apply?
The RBI has clarified several exclusions to help banks and users determine whether a derivative contract falls within the framework.
1. Transactions involving the sale of foreign currency: The requirement does not apply to derivative contracts where the user sells foreign currency against the Indian rupee.
2. Capital account hedging by users: Derivative contracts undertaken by users to hedge capital account transactions are excluded from the FERR requirement.
3. Certain payments arising from capital account transactions: Interest on External Commercial Borrowings (ECBs), coupons on resident debt instruments held by non-residents and dividends payable to non-resident investors may constitute current account payments. However, where these payments arise from underlying capital account transactions, user-entered derivatives undertaken to hedge such flows are excluded from FERR.
The position differs for Authorised Dealers. Banks hedging their own currency risks on such exposures may still be required to maintain FERR, subject to the conditions specified in Circular No. 27.
4. Derivatives not involving INR: Foreign exchange derivative contracts that do not involve the Indian rupee are outside the scope of the requirement.
5. Market-making and proprietary positions: FERR does not apply to transactions undertaken by Authorised Dealers for market-making or for assuming proprietary positions. The requirement for Authorised Dealers relates to eligible transactions undertaken to hedge currency risks associated with their own assets and liabilities.
6. Transactions with the RBI: Foreign currency derivative contracts involving INR undertaken by Authorised Dealers with the RBI are excluded.
USD 2 Million Threshold: How Is It Determined?
The FERR requirement applies to qualifying derivative contracts undertaken by Authorised Dealers with users where the notional value exceeds the equivalent of USD 2 million.
Accordingly, a qualifying contract with a notional value of USD 2 million equivalent or less is not subject to the requirement. The RBI has cautioned Authorised Dealers against structuring derivative transactions to avoid the prescribed threshold.
For option contracts, the threshold is determined using the notional amount of the option contract. Where two or more options are combined into a single structure, the structure is treated as one derivative contract. The notional amount of the option with the highest notional value is considered for applying the USD 2 million threshold and calculating FERR.
How Is FERR Calculated? RBI Prescribes a 20% Reserve
The FERR amount is calculated at 20% of the INR equivalent of the notional amount of each applicable derivative contract.
For example, consider a qualifying derivative contract with a notional value of USD 10 million and a contracted exchange rate of ₹95 per US dollar.
| Particulars | Amount |
|---|---|
| Notional value | USD 10 million |
| Contracted exchange rate | ₹95 per USD |
| INR equivalent of notional value | ₹95 crore |
| Applicable FERR rate | 20% |
| FERR to be maintained | ₹19 crore |
In this example, the Authorised Dealer must maintain FERR of ₹19 crore with the RBI for the applicable period.
How and Where Must FERR Be Maintained?
Authorised Dealers are required to deposit and maintain FERR in their current account with the RBI. The reserve must be maintained on a daily basis.
The reserve applicable to a particular derivative contract must be maintained from the working day immediately following the date on which the contract is undertaken. The calculation is made on a gross basis for each eligible derivative transaction.
Authorised Dealers must maintain detailed records of qualifying contracts and the corresponding FERR amounts. These records are subject to audit.
The RBI has also clarified that the balance maintained for FERR cannot be treated as interchangeable with the cash reserve required under Section 42(1) of the Reserve Bank of India Act, 1934. The minimum balance in the current account must cover the aggregate of the bank's Cash Reserve Ratio (CRR) obligation, FERR and any other applicable cash-reserve requirement.
FERR does not earn interest. Further, the amount maintained as FERR cannot be included in High Quality Liquid Assets (HQLA) for the purposes of the Liquidity Coverage Ratio (LCR) framework.
How Long Must the Reserve Be Maintained?
The FERR requirement continues until the day after the relevant derivative contract is terminated.
The RBI has also specified how the reserve should be treated when a contract is partially cancelled:
- Partial cancellation while the contract remains above the threshold: FERR must be recalculated on a pro-rata basis using the remaining notional amount, with the revised amount applicable from the following day.
- Remaining notional falls below USD 2 million equivalent: The FERR requirement ceases from the day following the reduction below the prescribed threshold.
These provisions ensure that the reserve reflects the outstanding exposure under the eligible derivative contract.
Treatment of Existing and Rolled-Over Contracts
The FERR requirement applies to eligible derivative contracts entered into after the issuance of the respective RBI directions dated October 10 and October 12, 2026. Contracts entered into before the applicable directions are not covered retrospectively.
However, if a derivative contract entered into before the directions is rolled over after the applicable directions have been issued, the rolled-over contract is treated as a fresh contract. FERR will therefore apply if the renewed contract satisfies the prescribed conditions.
Authorised Dealers should accordingly review their rollover processes and assess whether each renewed contract attracts the reserve requirement.
FERR Reporting Requirements and Deadline
Authorised Dealers must report FERR details daily through the RBI's Centralised Information Management System (CIMS).
The report must cover both:
- Qualifying derivative contracts undertaken with users.
- Derivative contracts undertaken by Authorised Dealers to hedge their own currency risks.
The reporting deadline is 5:00 PM on the following working day (T+1) for the relevant reporting date. The report must include derivative contracts undertaken on that date, along with all outstanding contracts and their current notional amounts against which FERR is maintained.
The reporting format is available through CIMS. Authorised Dealers should ensure that their reporting systems capture transaction-level details, outstanding notional values, reserve calculations and changes arising from partial cancellations or contract termination.
What Should Banks and Authorised Dealers Do Next?
The RBI's clarifications make it important for Authorised Dealers to review their foreign exchange derivative operations and internal controls. Banks should identify contracts that meet the prescribed eligibility criteria, calculate FERR at the transaction level and ensure the required balances are available in their RBI current accounts.
They should also strengthen monitoring of the USD 2 million threshold, option structures, rollovers and partial cancellations. Daily reconciliation of FERR balances with outstanding contracts and timely submission of CIMS reports will be essential for compliance.
For users entering into foreign exchange derivatives, understanding whether a contract involves INR, whether foreign currency is being purchased, and whether the underlying exposure qualifies as a current account transaction will help determine whether the requirement applies.
Conclusion
The RBI's FERR framework introduces a defined reserve requirement for specified foreign exchange derivative contracts involving the Indian rupee. Under the prescribed conditions, Authorised Dealers must maintain a reserve equal to 20% of the INR-equivalent notional amount of each eligible contract, subject to the applicable threshold, exclusions and maintenance rules.
The FAQs issued following Circulars No. 26 and No. 27 provide operational clarity on calculation, daily maintenance, partial cancellations, rollovers and reporting. Authorised Dealers should align their treasury operations, risk-management systems and compliance processes with these requirements to ensure accurate reserve maintenance and timely reporting.
Official RBI references:
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