Rupee Nears 97 per Dollar as RBI Tightens Forex Rules to Curb Speculation

Rupee Nears 97 Against Dollar as RBI Tightens Forex Derivatives Rules

With the rupee weakening towards the 97-per-dollar mark and crude oil prices remaining above $100 a barrel, the Reserve Bank of India (RBI) has introduced a series of measures to tighten oversight of the foreign exchange derivatives market. The steps aim to curb excessive speculation, improve transparency and ensure that currency transactions are linked more closely to genuine economic exposure.

The new regulatory framework restricts the rebooking of cancelled foreign exchange derivative contracts involving the rupee, lowers the threshold for transactions that can be undertaken without proving underlying exposure, strengthens documentation requirements and introduces a Foreign Exchange Risk Reserve (FERR). These changes are expected to affect banks, corporates, financial institutions and currency market participants.

The pressure on the rupee comes amid a decline in India’s foreign exchange reserves. Reserves fell by $12.95 billion to $734.60 billion in the week ended October 2. The domestic currency has remained under strain despite inflows exceeding $143 billion under the FCNR scheme.

Rising crude oil prices are adding to the economic challenges by increasing the risk of imported inflation. Retail inflation is projected to reach 5.2 per cent in FY27, while the RBI has raised the repo rate by 25 basis points to 5.50 per cent, according to the figures provided.

The latest measures signal a tighter regulatory approach to currency trading. Market participants may face higher transaction costs, additional compliance requirements and closer scrutiny of their foreign exchange positions.

RBI Cuts Threshold for Forex Derivatives to $5 Million

A key change is the sharp reduction in the threshold for foreign exchange derivative transactions that do not require participants to establish an underlying exposure.

The RBI has lowered the limit from $100 million to $5 million equivalent across authorised dealers. A similar reduction applies to exchange-traded currency derivatives involving the rupee, with the threshold brought down from $100 million to $5 million across all recognised stock exchanges combined.

The change represents a 95 per cent cut in the threshold and significantly narrows the scope for undertaking such transactions without demonstrating a corresponding foreign exchange exposure.

However, the revised limit does not amount to a blanket prohibition on currency derivatives exceeding $5 million. Rather, it tightens the conditions under which transactions can be conducted without establishing the underlying exposure.

The move is intended to discourage large positions that are insufficiently connected to genuine commercial or financial risks.

Rebooking Cancelled Contracts Faces Restrictions

The RBI has also tightened rules governing the cancellation and rebooking of foreign exchange derivative contracts involving the rupee.

Under the revised directions, authorised dealers cannot allow users to rebook a rupee-involving derivative contract, whether deliverable or non-deliverable, if the contract was cancelled with any authorised dealer after the directions were issued.

The restriction specifically concerns the rebooking of cancelled contracts. It does not prohibit all fresh derivative transactions. The RBI has also clarified that rolling over contracts upon maturity will remain permissible, subject to existing regulatory requirements.

Repeatedly cancelling and rebooking contracts can allow market participants to adjust their positions as exchange rates fluctuate. The new restrictions limit that flexibility and encourage greater discipline when entering into derivative agreements.

For businesses managing foreign exchange risks, the changes could make last-minute adjustments more difficult, particularly during periods of sharp currency movements.

Stronger Checks to Prevent Double Hedging

The central bank is also seeking to prevent the same underlying foreign exchange exposure from being hedged through multiple authorised dealers.

Banks must obtain and retain an undertaking from users entering into rupee-involving derivatives to hedge contracted exposures. The declaration must confirm that the same underlying exposure has not already been hedged through another authorised dealer.

The requirement increases the responsibility of both customers and banks to ensure that derivative positions are supported by genuine exposures and are not duplicated.

For businesses, the new rule means more documentation and stronger internal checks. Banks, meanwhile, will need to strengthen compliance procedures and examine customer declarations more carefully.

The objective is to improve transparency and reduce the possibility of multiple derivative contracts being justified against a single commercial exposure.

New 20% Forex Risk Reserve Could Increase Costs for Banks

Another significant element of the RBI’s package is the introduction of the Foreign Exchange Risk Reserve.

Under the new requirement, authorised dealers must maintain a cash reserve with the RBI equal to 20 per cent of the rupee equivalent of the notional value of specified rupee-involving foreign exchange derivative contracts exceeding $2 million.

The provision applies to covered contracts used to hedge current-account exposures in which a user purchases foreign currency against the rupee.

The requirement could affect banks’ liquidity management because the prescribed cash must be set aside rather than used freely for other purposes. It may also increase the cost of providing covered derivative products, influence pricing and prompt banks and customers to reconsider their hedging strategies.

However, the reserve should not be confused with a 20 per cent fee imposed directly on customers. It is a cash reserve requirement applicable to authorised dealers for the specified transactions.

Why Has the RBI Tightened Forex Rules?

The rupee has been under pressure from capital-flow trends, demand for currency hedging and an uncertain global economic environment. On October 9, 2026, it closed at around 96.73 against the US dollar, near its record low, according to the figures provided.

Against this backdrop, the RBI appears to be focusing on a segment of the market where it can directly strengthen regulatory oversight: foreign exchange derivatives.

When traders build dollar positions in anticipation of further rupee depreciation, the resulting demand for foreign currency can add to market pressure and volatility. Derivatives activity can therefore become an important focus for regulators seeking to prevent speculative positions from amplifying currency movements.

The RBI’s latest measures aim to strengthen the connection between derivative transactions and genuine economic requirements, discourage repeated cancellation and rebooking, prevent duplicate hedging and impose additional liquidity safeguards on specified contracts.

For banks and businesses, the changes mean tighter compliance and potentially higher costs for certain transactions. For the broader market, the measures reflect the central bank’s effort to bring greater discipline to currency trading as the rupee faces sustained pressure.