Law Updates

Subject

Summary: The Reserve Bank of India (RBI) has recently made some changes in the regulations governing some foreign exchange derivative transactions related to the Indian Rupee. According to a circular dated 12 October 2026, the RBI has put a new constraint on the INR-based Non-Deliverable Derivative Contracts (NDDCs) provided to non-residents. Additionally, it has imposed the obligation of maintaining a Foreign Exchange Risk Reserve (FERR) for certain derivatives contracted by Authorised Dealers. The change is important for banks and other permitted financial institutions dealing in foreign exchange derivatives. Under the new directions, covered contracts will attract a cash reserve equal to 20% of their INR-equivalent notional amount. The reserve must remain with RBI in India on a daily basis until the contract ends. For Authorised Dealers, this is more than a change in transaction permissions. The new requirement may also affect how treasury departments manage cash, review derivative positions and maintain internal controls. The circular does not impose a 20% reserve on every foreign exchange transaction in India. Its application depends on the nature of the contract, the parties involved, and the conditions laid down by RBI. RBI Circular 2026: Notification at a Glance RBI issued A.P. (DIR Series) Circular No. 27 under its framework for Risk Management and Inter-Bank Dealings. Particulars Details Issuing Authority Reserve Bank of India Department Financial Markets Regulation Department Circular Title Risk Management and Inter-Bank Dealings Circular Reference RBI/2026-27/293 Circular Number A.P. (DIR Series) Circular No. 27 Issue Date 12 October 2026 Addressed To All Authorised Dealers Existing Regulatory Framework Master Direction - Risk Management and Inter-Bank Dealings, dated 5 July 2016, as amended First Major Change INR-related NDDCs offered to non-residents restricted to hedging purposes Second Major Change Foreign Exchange Risk Reserve for specified Authorised Dealer transactions FERR Rate 20% Calculation Basis INR-equivalent notional amount of each covered contract Deposit Requirement Cash deposited and maintained with RBI in India Maintenance Frequency Daily Maintenance Period Until termination of the contract Applicability Foreign exchange derivative contracts undertaken after issuance Governing Legislation FEMA, 1999 and RBI Act, 1934 The circular does not give institutions a separate implementation period. Instead, it makes the directions applicable to relevant foreign exchange derivative contracts undertaken after issuance. What Is the Regulatory Framework for INR Derivative Contracts in India? Foreign exchange derivatives are regulated financial instruments. Banks and other authorised institutions cannot offer or undertake them without regard to the applicable RBI directions. The Foreign Exchange Management Act, 1999 (FEMA), and the RBI's Master Direction on Risk Management and Inter-Bank Dealings form an important part of this framework. Role of RBI in Foreign Exchange Transactions RBI regulates permitted foreign exchange activities and issues directions governing how Authorised Dealers conduct those activities. These directions address matters such as the types of derivative products that may be offered, eligible market participants, permitted transaction purposes and conditions governing foreign exchange dealings. The circular of 12 October 2026 pertains to two distinct subjects: INR denominated NDDC to be offered to non-residents and derivative transactions conducted by Authorised Dealers to cover their own currency risk. This does not mean that it covers all of the foreign exchange regulation regime. Foreign Exchange Management Act, 1999 FEMA is responsible for foreign exchange dealings in India. As regards the RBI circular it deals with: Section 10(4): Addresses the obligation of authorised persons to comply with RBI directions while dealing in foreign exchange or foreign securities. Section 11(1): Provides RBI with powers to issue directions to authorised persons concerning payments and related matters under FEMA. These provisions matter because the directions issued by RBI are not simply recommendations for affected Authorised Dealers. Section 45W of the Reserve Bank of India Act, 1934 The circular also relies on Section 45W of the RBI Act, 1934, which concerns RBI's regulatory powers over specified derivative and related financial market transactions. Together, the cited statutory provisions provide the legal basis for RBI to regulate the activities addressed in the circular. Master Direction - Risk Management and Inter-Bank Dealings The Master Direction was originally issued on 5 July 2016 and has been amended on several occasions. The version published by RBI and updated as of 1 October 2026 contains the earlier provision referred to in the new circular. Under paragraph 2.3(iii) of Section I, Part A, specified Authorised Dealers were permitted to offer NDDCs involving INR to non-resident users without a restriction on purpose. That position has now changed. An important point is that the Master Direction's other conditions, product permissions and requirements must still be considered. The October circular should not be read in isolation from the wider framework. What Are Non-Deliverable Derivative Contracts (NDDCs)? A Non-Deliverable Derivative Contract is a type of foreign exchange derivative settled in cash rather than through delivery of the full underlying currency amounts. It is an over-the-counter (OTC) contract, meaning it is arranged outside a recognised stock exchange, although OTC transactions may also be conducted through permitted electronic trading platforms. The value of a foreign exchange derivative depends on exchange-rate movements between currencies. How Does an NDDC Work? The parties to an NDDC agree to contractual terms linked to currency exchange rates. Unlike a deliverable derivative, the full notional amounts of the underlying currencies are not delivered when the contract is settled. Instead, the contract is settled through a cash amount determined by its terms. NDDCs can be used to manage foreign exchange exposure. Their use, however, remains subject to the permissions and conditions applicable to the particular transaction. Difference Between Deliverable and Non-Deliverable Derivatives Basis Deliverable Derivative Non-Deliverable Derivative Settlement May involve delivery of the relevant currencies Cash settlement without delivery of underlying notional amounts Contract Purpose Depends on the applicable RBI permissions Depends on the applicable RBI permissions Currency Exposure Linked to exchange-rate movements Linked to exchange-rate movements Applicable Conditions Product-specific RBI requirements Product-specific RBI requirements The distinction matters because the October circular specifically addresses the purpose for which INR-related NDDCs may be offered to non-resident users. What Does Hedging Mean in Foreign Exchange Transactions? Hedging is the use of a financial transaction to offset the effect of a currency exposure. That exposure may arise from a transaction already entered into or from an anticipated transaction, subject to the regulatory definition. For a business, a change in exchange rates can alter the rupee value of foreign currency payments or receipts. A hedge is intended to reduce the effect of such movements on the relevant exposure. This is different from entering into a derivative solely to benefit from a predicted currency movement. RBI's latest directions make this distinction especially important for INR-related NDDCs offered to non-residents. Scope and Applicability: Who Is Covered by the RBI INR Derivative Rules 2026? The new directions are addressed to Authorised Dealers, but the obligations do not operate identically for every transaction. The Master Direction generally uses the term Authorised Dealer for AD Category-I banks and Standalone Primary Dealers authorised as AD Category-III, unless stated otherwise. Authorised Dealer Category-I Banks AD Category-I banks are authorised to conduct permitted foreign exchange activities. The earlier NDDC provision specifically referred to Category-I banks with an operating IFSC Banking Unit. Where such banks offer covered INR-related NDDCs to non-resident users, the revised hedging-purpose restriction is relevant. A separate assessment is needed where a bank enters into derivatives to hedge currency risk arising from its own assets and liabilities. Standalone Primary Dealers The earlier provision also refers to Standalone Primary Dealers authorised as AD Category-III. Their permission to undertake relevant NDDC transactions is subject to the applicable RBI framework. Following the circular, covered NDDCs offered to non-resident users must satisfy the hedging-purpose restriction. Non-Resident Users Non-resident users are relevant because the first change directly concerns the conditions under which Authorised Dealers may offer them INR-related NDDCs. These users can no longer rely on the earlier permission allowing the specified NDDCs to be offered without a restriction on purpose. However, the 20% FERR obligation under Circular No. 27 is directed at Authorised Dealers undertaking covered transactions for their own currency risk. It should not automatically be described as a reserve that every non-resident customer must deposit. Which Transactions Attract the New FERR Requirement? Paragraph 3 concerns foreign exchange derivative contracts involving INR undertaken by an Authorised Dealer to hedge currency risk associated with its own assets and liabilities. The provision also specifies that FERR applies where the Authorised Dealer purchases foreign currency against INR. Category Applicability Under Circular No. 27 Covered INR-related NDDCs offered to non-residents Hedging-purpose restriction Authorised Dealer derivatives used to hedge own asset and liability currency exposure FERR may apply where the prescribed conditions are met Covered derivative in which the Authorised Dealer purchases foreign currency against INR Subject to FERR within the stated own-exposure framework Contracts undertaken before issuance New directions are not expressly made retrospective All ordinary foreign exchange purchases Not automatically covered merely because foreign currency is involved Non-resident customers Not automatically responsible for the Authorised Dealer's FERR deposit These conditions must be considered together. The transaction's regulatory classification matters more than the general label used to describe it. What Has Changed Under the RBI Circular Dated 12 October 2026? Two major changes have been effected by RBI. First, about the permissible use of a certain type of derivative offered to non-residents. Second, about the cash balances that have to be kept by Authorised Dealers with regard to certain own-exposure hedges. INR-Related NDDCs Are Now Restricted to Hedging Purposes Previously, the said Authorised Dealers could sell INR-linked NDDCs to non-residents without any such restriction of use as per paragraph 2.3(iii). Circular No. 27 removes that freedom. The revised position requires Authorised Dealers to offer such NDDCs to non-resident users only for hedging. This does not amount to a complete ban on NDDCs. It means that the purpose of the covered transaction must meet the new regulatory condition. For affected institutions, a practical response is to review how transaction purposes are assessed before covered contracts are offered. FERR Is Required for Specified Own-Exposure Hedges The circular also requires an Authorised Dealer to maintain a Foreign Exchange Risk Reserve for covered INR-related derivative contracts undertaken to hedge its own assets and liabilities. This is separate from the hedging-purpose restriction applicable to NDDCs offered to non-residents. An institution therefore needs to examine both provisions independently. FERR Applies to the Specified Direction of Currency Purchase The circular identifies contracts where the Authorised Dealer is purchasing foreign currency against INR. This is an important condition. A derivative involving INR should not automatically be classified as subject to this requirement without examining the direction of the transaction and its connection to the Authorised Dealer's own exposure. Reserve Set at 20% of the Notional Amount RBI has prescribed a FERR equal to 20% of the INR-equivalent notional amount of each applicable derivative contract. The requirement is linked to the contract's notional amount, not the profit earned on that contract. Reserve Must Be Held in Cash Until the Contract Ends The amount must be deposited and maintained with RBI in India. It must be maintained daily and continue until termination of the contract. For affected banks, this makes FERR an ongoing treasury and reserve-management consideration. Old vs New RBI Requirements for INR Derivative Contracts The earlier and revised provisions can be compared as follows. Regulatory Area Earlier Position Revised Position INR-related NDDCs offered to non-residents Specified Authorised Dealers could offer them without restriction on purpose Such contracts may be offered only for hedging Purpose of covered NDDCs No purpose restriction under the cited earlier provision Hedging is required Reserve on specified own-exposure derivatives Not established by the earlier NDDC permission Express FERR obligation under Circular No. 27 Reserve percentage The 20% FERR framework was separately introduced for specified user transactions on 10 October 20% applies to contracts covered by the 12 October directions Reserve deposit Depends on the relevant earlier framework Cash maintained with RBI in India Duration Depends on the applicable earlier directions Daily until contract termination Applicability to contracts Earlier framework governs transactions undertaken before the new directions New directions apply to contracts undertaken after issuance The comparison makes one point clear: not every change concerns the same type of transaction. The NDDC restriction addresses dealings with non-resident users. The reserve provision addresses qualifying derivatives undertaken by Authorised Dealers for their own currency exposures. What Is the Foreign Exchange Risk Reserve (FERR)? FERR is the cash reserve prescribed by RBI against specified foreign exchange derivative contracts. Under Circular No. 27, an Authorised Dealer must maintain this reserve when the relevant derivative contracts satisfy the conditions laid down in paragraph 3. Why Is FERR Different from Other Banking Reserves? Banks are subject to several financial and prudential requirements, but FERR should not be confused with the Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR). FERR is linked to covered derivative contracts and is calculated using their INR-equivalent notional amounts. It is not a general reserve based on every bank deposit or a charge imposed on every customer buying foreign currency. Who Must Maintain FERR? The obligation rests with the Authorised Dealer undertaking the covered transaction. The circular does not shift this obligation to every customer dealing with that institution. What Does the Reserve Mean for Treasury Management? Cash maintained against covered derivatives may affect the funds available for other treasury purposes during the life of those contracts. That is a practical implication of the requirement rather than a separate rule stated in the circular. Institutions with relevant derivative portfolios may need to consider the reserve when planning liquidity and monitoring currency positions. How Is the 20% Foreign Exchange Risk Reserve Calculated? The RBI has prescribed the percentage and the basic calculation method. For each covered derivative contract, FERR must equal 20% of its INR-equivalent notional amount. What Is the Notional Amount? A derivative contract has a reference amount known as the notional amount. This amount is used in determining the contract's economic exposure and relevant settlement calculations. It is not necessarily the cash amount paid or received by either party at settlement. What Is the INR-Equivalent Notional Amount? The INR-equivalent notional amount is the value of the contract's notional amount expressed in Indian Rupees. Where conversion is necessary, the institution must use the applicable method under the relevant regulatory and operational framework. Circular No. 27 does not independently prescribe a complete exchange-rate conversion methodology for every circumstance. FERR Calculation Formula FERR = 20% × INR-equivalent notional amount of each applicable contract The calculation is contract-based. The circular does not expressly provide a general permission to reduce the reserve through netting unrelated contracts. Is There a Minimum Transaction Threshold? Circular No. 27 does not expressly prescribe a USD 2 million threshold for the own-exposure hedges covered by it. This is an important difference from RBI Circular No. 26 dated 10 October 2026. Circular No. 26 applies a USD 2 million-equivalent threshold to certain foreign exchange derivative contracts undertaken with users for hedging current account transactions, where the user purchases foreign currency against INR. That threshold should not automatically be carried over to Circular No. 27. Is the 20% Reserve a Government Fee? No. The reserve is a prescribed amount of cash to be maintained with RBI against covered derivative contracts. The circular does not describe it as a licence fee, transaction tax, application charge or penalty. Any financial cost resulting from maintaining the reserve must be considered separately from the legal amount prescribed. FERR Deposit and Daily Maintenance Requirements Paragraph 3(iv) specifies how the reserve must be maintained. Requirement RBI Direction Practical Consideration Form of Reserve Cash Maintain the prescribed amount in the required form Location India Reserve must be deposited in India with RBI Institution Holding Reserve Reserve Bank of India Relevant Authorised Dealer must follow the applicable RBI arrangement Maintenance Frequency Daily Monitor the required reserve against covered contracts Maintenance Period Until contract termination Account for the life of the contract Cash Maintenance Is Required The circular expressly requires the reserve to be maintained in cash. It does not prescribe an alternative under which the relevant Authorised Dealer may substitute unrelated financial assets for the required cash reserve. The Reserve Must Be Held with RBI The requirement is to deposit and maintain FERR with the Reserve Bank of India. The circular does not provide a separate public application process, deposit portal or detailed account-opening procedure for this obligation. Daily Monitoring Becomes Important Since the reserve must be maintained daily, Authorised Dealers need to pay attention to the outstanding contracts for which the requirement applies. Institutions may use internal treasury and finance controls to check that the prescribed amounts are maintained. Such internal arrangements are implementation practices; they are not a separately prescribed workflow under Circular No. 27. Reserve Maintenance Ends with Contract Termination The direction requires maintenance until termination of the contract. Where a contract is amended, replaced, rolled over or terminated early, the appropriate regulatory treatment should be established from the applicable rules and clarifications. It should not be decided solely by assuming that every contractual change has the same effect. Difference Between RBI Circular No. 26 and Circular No. 27 of 2026 RBI issued two related directions within a short period, but their coverage is different. Circular No. 26, dated 10th October 2026, refers to the foreign exchange derivative contracts executed with the user. Circular No. 27, dated 12th October 2026, brings out the hedging limitation applicable to relevant INR NDDCs offered to non-residents and applies FERR provisions to specified own-exposure transactions of Authorised Dealers. Particulars Circular No. 26 Circular No. 27 Issue Date 10 October 2026 12 October 2026 Main FERR Coverage Specified derivative transactions undertaken with users Specified derivatives undertaken by Authorised Dealers to hedge their own assets and liabilities Relevant Currency Purchase User purchases foreign currency against INR Authorised Dealer purchases foreign currency against INR Notional Threshold Exceeding USD 2 million equivalent for specified transactions No separate threshold expressly stated Reserve Rate 20% 20% Reserve Maintenance Daily cash maintenance with RBI Daily cash maintenance with RBI CIMS Reporting Expressly provided in Circular No. 26 Not separately prescribed in Circular No. 27 Additional NDDC Restriction Not the principal change covered here NDDCs involving INR offered to non-residents restricted to hedging Why This Difference Matters Banks may undertake derivative transactions for customers as well as for managing their own currency exposure. The applicable requirements cannot be determined simply by looking at whether INR is involved. It is necessary to identify who is purchasing foreign currency, the purpose of the contract and the particular circular governing the transaction. Applying conditions from one circular indiscriminately to the other could lead to an incorrect compliance assessment. When Do the New RBI Directions Come Into Effect? Circular No. 27 was issued on 12 October 2026. Paragraph 4 states that the directions apply to foreign exchange derivative contracts undertaken after issuance. Applicability to New Contracts Relevant contracts undertaken after issuance must be assessed against the revised requirements. An affected Authorised Dealer should therefore consider the applicable directions before undertaking a covered transaction. What Happens to Existing Contracts? The circular does not expressly make the new requirements retrospective for contracts undertaken before its issuance. This means the document itself does not impose a blanket retrospective FERR obligation on all older contracts. However, the treatment of subsequent amendments or replacement contracts should be checked against the applicable regulatory framework. Is There a Separate Compliance Deadline? No separate transition deadline or grace period is expressly mentioned in Circular No. 27. The relevant trigger is the undertaking of a covered contract after issuance of the directions. Institutions should not assume they have an additional fixed period to begin complying. How Will the RBI Directions Affect Banks and Financial Institutions? The impact depends on the transactions an institution undertakes. A bank that does not enter into the relevant derivative contracts will not necessarily face the same operational requirements as one with a substantial portfolio of covered positions. Impact on Authorised Dealer Banks Banks offering INR-related NDDCs to non-resident users must consider the revised hedging-purpose condition. Those undertaking their own covered foreign exchange derivatives must also assess FERR. For affected institutions, the work may involve reviewing transaction classifications, reserve calculations and the internal responsibility for daily maintenance. Impact on Standalone Primary Dealers Eligible Standalone Primary Dealers also need to take account of the purpose restriction where they offer the relevant NDDCs. Where their transactions satisfy the conditions of paragraph 3, the FERR requirement must be considered. Impact on Non-Resident Users Non-resident users seeking INR-related NDDCs are affected by the change in permissible purpose. A transaction that does not qualify as hedging cannot rely on the earlier unrestricted-purpose permission under the cited provision. The circular does not, however, prohibit every non-resident from using an INR-related derivative for a permitted hedging purpose. Impact on Banking Treasury Departments Treasury departments may need to assess how much cash must be maintained against covered contracts. This could influence: Daily liquidity planning. Internal monitoring of currency exposure. Allocation of cash resources. Coordination between trading, treasury and finance functions. Review of outstanding derivative positions. These are potential operational implications. Their actual financial effect will vary by institution. Impact on Risk Management and Compliance Teams The changes also make it important to distinguish between the different purposes for which derivatives are undertaken. A transaction used to hedge a customer's exposure is not automatically governed by the same conditions as a contract used by an Authorised Dealer to hedge its own assets and liabilities. Internal reviews should preserve that distinction. What Are the Compliance Responsibilities of Authorised Dealers? The principal obligations under Circular No. 27 can be grouped into two areas. Obligations Relating to NDDCs For covered INR-related NDDCs offered to non-resident users, the Authorised Dealer must comply with the hedging-purpose restriction. A review of the proposed transaction's purpose is therefore relevant. The circular does not, by itself, introduce a new named declaration form or a separate NDDC registration portal. Obligations Relating to FERR For applicable own-exposure derivative contracts, the Authorised Dealer must: Determine whether the contract falls within paragraph 3. Identify the INR-equivalent notional amount. Calculate FERR at 20%. Deposit and maintain the required reserve in cash with RBI in India. Maintain the reserve daily until the contract terminates. These points reflect the express reserve provisions. Documentation and Records The circular does not contain a new documentary checklist or a specified record-retention period for FERR. Nevertheless, accurate transaction and calculation records may help an institution demonstrate how it has assessed and met the relevant obligation. Any independently applicable reporting and recordkeeping duties under other directions must be considered separately. Risks and Consequences of Incorrect Compliance Incorrectly applying the revised directions may expose an affected institution to regulatory and operational difficulties. The specific nature of the risk depends on the relevant provision and circumstances. Incorrect Transaction Classification If a contract is treated as outside the directions without examining its characteristics, the institution may overlook an applicable requirement. Inaccurate FERR Calculation Using the wrong notional amount or incorrectly identifying a covered contract could result in a reserve amount that does not match the prescribed calculation. Failure to Maintain the Required Cash Reserve Where the obligation applies, failing to maintain the required cash reserve would be inconsistent with the circular's express directions. Confusing the Two October Circulars Applying the USD 2 million threshold from Circular No. 26 automatically to Circular No. 27 could lead to an incorrect assessment of own-exposure transactions. Similarly, reporting obligations should be attributed to the circular or governing provision that actually prescribes them. Are Specific Penalties Prescribed? Circular No. 27 does not expressly specify a separate monetary penalty, suspension period or prosecution procedure for breach of these directions. It would therefore be misleading to publish particular penalty amounts without examining and citing the applicable statutory provisions and their enforcement conditions. What Should Banks and Authorised Dealers Do Next? For affected institutions, a targeted review of foreign exchange derivative activity is more useful than treating the circular as a general banking compliance exercise. Step 1: Identify Relevant Derivative Activities Review whether the institution offers INR-related NDDCs to non-resident users, undertakes derivatives for its own currency exposure, or both. Step 2: Check the Purpose of Covered NDDCs Assess whether the proposed INR-related NDDCs offered to non-residents are for hedging. Where necessary, examine the institution's existing method for understanding and recording transaction purposes. Step 3: Identify Contracts Subject to FERR Check the conditions in paragraph 3, particularly: Whether the contract involves INR. Whether it hedges currency risk relating to the Authorised Dealer's own assets and liabilities. Whether the Authorised Dealer purchases foreign currency against INR. As to whether the contract is included within the time span of the directions. Step 4: Review Reserve Calculation Verify that contracts under coverage are evaluated based on the 20% rule and the appropriate notional value in INR. Step 5: Check Daily Reserve Maintenance Evaluate arrangements for maintaining the required cash with RBI until termination of the contract. Step 6: Review Internal Financial Controls Institutions may examine whether their transaction classifications, approval records, reserve calculations and reconciliations are adequately controlled. Where an independent review is appropriate, internal audit arrangements may help identify weaknesses in the institution's operational controls. Step 7: Check Subsequent RBI Directions Operational queries that are not covered by Circular No. 27 can be judged on the basis of subsequent RBI clarifications, if any. This is proportional compliance and risk management measures. It should not be considered a new registration requirement under law. Financial and Operational Challenges for Affected Institutions The cash reserve requirement may influence how affected Authorised Dealers manage their resources. Liquidity Planning Cash maintained under FERR is committed to meeting a regulatory requirement during the life of the covered contract. Institutions may therefore need to consider these amounts when reviewing available treasury funds. Maintaining Accurate Contract Information Identifying relevant contracts requires accurate information about the transaction purpose, currency pair, notional amount and contract status. Inaccurate classification may complicate reserve calculations. Coordination Between Departments Trading, treasury, finance, risk management and compliance departments may need a consistent understanding of which transactions attract FERR. Clear internal responsibility can help reduce errors and unnecessary duplication of reviews. Operational Questions Not Answered by the Circular Circular No. 27 does not provide a complete explanation of every operational issue, including the detailed treatment of modified derivative contracts or the precise deposit mechanism. Institutions should distinguish such open questions from requirements that RBI has already stated clearly. How Corpseed Can Help with FEMA and Regulatory Compliance The RBI's October 2026 directions show why foreign exchange compliance needs to be assessed against the actual business activity and applicable regulatory provisions. A business dealing with cross-border transactions may require assistance understanding relevant FEMA requirements, while an Authorised Dealer undertaking covered derivatives must also address the specialised RBI directions applicable to those transactions. Corpseed offers FEMA compliance services for businesses seeking support with foreign exchange-related regulatory requirements. Depending on the engagement, relevant assistance may include: Understanding the applicability of FEMA requirements. Reviewing compliance-related documentation. Identifying regulatory requirements connected with foreign exchange activities. Supporting broader regulatory compliance reviews. Assessing whether existing internal controls and audit arrangements require further examination. Corpseed also offers services relating to internal financial controls and internal audits. These may be relevant where a business is reviewing its broader financial control environment. Specialised FERR calculations, treasury implementation and derivative-contract interpretations should be handled by appropriately qualified banking and financial regulatory professionals. Need assistance understanding FEMA compliance requirements? Contact Corpseed to discuss the regulatory requirements relevant to your organisation and the support available for your specific needs. Key Takeaways The RBI circular dated 12 October 2026 brings two changes to the regulatory treatment of specified INR-related foreign exchange derivative activities. First, NDDCs involving INR offered to non-resident users are now restricted to hedging purposes under the revised directions. Second, Authorised Dealers must maintain a Foreign Exchange Risk Reserve equal to 20% of the INR-equivalent notional amount of covered derivative contracts undertaken to hedge currency risks associated with their own assets and liabilities. The reserve must be held in cash with RBI in India, maintained daily and continued until termination of the contract. These directions apply to foreign exchange derivative contracts undertaken after issuance. For affected institutions, the priority is to identify the transactions covered by the directions, determine the reserve obligation correctly and ensure that relevant internal processes reflect the new requirements.