Foreign Exchange Risk Reserve:
The Reserve Bank of India (RBI) has unveiled a comprehensive suite of emergency measures to stem the ongoing slide of the Indian rupee. A central highlight of this intervention is the Foreign Exchange Risk Reserve (FERR).
- The RBI’s strategic deployment of the FERR is being widely analyzed by economists as a reversal of the “China playbook” on currency management.
- The Mechanism: In October 2026, the RBI introduced a 20% FERR on specified rupee-linked forex derivative contracts involving the purchase of foreign currency against INR.
- Initially, the 20% cash reserve requirement applied to eligible customer contracts exceeding USD 2 million.
- It is extended to authorised dealers’ own hedging contracts, regardless of the contract value.
- The reserve must be maintained daily with the RBI in cash until the contract ends.
- By mandating this reserve, the central bank intentionally makes purchasing forward dollar protection more expensive for domestic banks and traders.
- The mandate disincentivizes entities from indiscriminately forward-booking dollars to hedge against potential future rupee depreciation, which itself fuels immediate downward pressure on the currency.
- The measure specifically targets domestic institutions and onshore traders rather than offshore entities, penalizing local market activity contributing to self-fulfilling sell-offs and curbing localized speculative bets.
