On 12 October 2026, two days after Circulars 25 and 26, the RBI issued A.P. (DIR Series) Circular No. 27 with two further directions. Authorised Dealers may now offer INR non-deliverable derivative contracts to non-resident users only for hedging, and an Authorised Dealer must deposit 20% of the INR equivalent of the notional amount in cash with the RBI for each forex derivative contract it undertakes to hedge the currency risk of its own assets and liabilities, where it is buying foreign currency against INR.
Quick Answer
RBI A.P. (DIR Series) Circular No. 27 of 12 October 2026 issues two directions under the Master Direction on Risk Management and Inter-Bank Dealings dated 5 July 2016, as amended from time to time.. First, Authorised Dealers may offer non-deliverable derivative contracts (NDDCs) involving INR to a non-resident user only for the purpose of hedging. Second, an Authorised Dealer must maintain a Foreign Exchange Risk Reserve (FERR) equal to 20% of the INR equivalent of the notional amount of each forex derivative contract it undertakes to hedge the currency risk of its own assets and liabilities, where it is buying foreign currency against INR. The FERR is held in cash with the RBI, on a daily basis, until the contract ends. Both apply to contracts undertaken after the circular.
What Changed?
How This Differs From Circulars 25 and 26
Circular 27 states no threshold such as USD 2 million for the dealer-hedge FERR. Whether the two FERR requirements stack on the same underlying position is not addressed in the text. [INTERNAL LINK: RBI forex derivative curbs and FERR, October 2026]
Who Is Affected?
Key Dates
5 July 2016: Master Direction on Risk Management and Inter-Bank Dealings.
10 October 2026: Circulars 25 and 26, and Press Release 1305.
12 October 2026: Circular 27 issued; applies to contracts undertaken after issuance.
The circular does not say whether contracts entered into on 12 October itself fall inside "after the issuance". Treat that as a point to confirm.
Compliance Checklist for Authorised Dealers
Practical steps drawn from the text, not a checklist issued by the RBI.
- Stop offering INR NDDCs to non-resident users for any purpose other than hedging, for contracts undertaken after the issuance of Circular 27 (dated 12 October 2026). Confirm the treatment of contracts entered into on 12 October itself.
- Decide how hedging purpose will be established and documented for non-resident users. The circular gives no documentation format.
- Identify own-book forex derivatives involving INR where the bank buys foreign currency against INR.
- Compute FERR at 20% of the INR equivalent of the notional for each such contract.
- Arrange daily cash deposit with the RBI in India and maintain it until each contract terminates.
- Reconcile with the FERR already required under Circular 25 and 26 to avoid double counting or gaps.
- Update internal policies and IFSC Banking Unit procedures.
Open Questions
- The circular does not define how a non-resident user's hedging purpose is evidenced.
- No threshold, reporting channel or interest treatment is stated for the dealer-hedge FERR. Circulars 25 and 26 refer to daily reporting through CIMS, but Circular 27 does not say the same.
- The treatment of contracts that existed before the circular is not stated beyond "undertaken after the issuance".
- The interaction with the FERR under Circulars 25 and 26 is not addressed.
Frequently Asked Questions
What does RBI Circular No. 27 of 12 October 2026 do?
It restricts INR non-deliverable derivative contracts for non-resident users to hedging, and requires a 20% cash FERR on Authorised Dealers' own INR hedging contracts where they buy foreign currency against INR.
Who can no longer offer INR NDDCs without a purpose test?
Authorised Dealer Category-I banks with an operating IFSC Banking Unit, and Standalone Primary Dealers authorised as Authorised Dealer Category-III, named in para 2.3(iii). The circular says "Authorised Dealers shall offer NDDCs involving INR to a non-resident user only for the purpose of hedging."
What is the FERR rate in this circular?
Under RBI Circular No. 27, the Foreign Exchange Risk Reserve (FERR) is 20% of the INR equivalent of the notional amount of each foreign exchange derivative contract covered by the Directions.
How is the FERR paid?
An Authorised Dealer must deposit and maintain the FERR by way of cash in India with the Reserve Bank of India on a daily basis, until the termination of the contract.
Which contracts attract the FERR in Circular 27?
Foreign exchange derivative contracts involving INR undertaken by an Authorised Dealer to hedge the currency risk of its own assets and liabilities, where the dealer purchases foreign currency against INR.
When does it apply?
RBI Circular No. 27 applies to foreign exchange derivative contracts undertaken after its issuance on 12 October 2026. The circular does not state whether contracts entered into on 12 October itself are covered.
Is this the same FERR as in Circulars 25 and 26?
The rate and form are the same, but Circular 27 covers the dealer's own hedging rather than user hedges above USD 2 million. The circular does not discuss how the two interact.
Does RBI Circular No. 27 provide any exemption or penalty?
The text of Circular No. 27 states no exemption from the hedging-only rule for INR NDDCs offered to non-resident users or from the 20% FERR requirement, and it does not specify a consequence for non-compliance. It states that the Directions are without prejudice to permissions or approvals, if any, required under any other law.
Under what law are the directions issued?
Sections 10(4) and 11(1) of FEMA, 1999 and Section 45W of the RBI Act, 1934.
Does the circular affect resident users?
The text addresses only non-resident users of NDDCs and the dealers' own hedging. The resident-user rules changed in Circulars 25 and 26.
CorpLawUpdates Analysis
Taken with Circulars 25 and 26, this extends the October package from user-facing curbs to the offshore NDDC channel and to dealers' own books. A cash deposit equal to 20% of the INR equivalent of the notional amount is likely to raise the cost for Authorised Dealers of buying foreign currency against rupees through derivatives for their own books, and restricting NDDCs to hedging narrows one route for offshore positioning in the rupee. These are editorial readings; the circular itself gives no reason for either change. Compliance teams should first seek clarity on how hedging purpose is evidenced, what reporting applies to the dealer-hedge FERR, and how it overlaps with the FERR under Circulars 25 and 26.
Document: Risk Management and Inter-Bank Dealings, A.P. (DIR Series) Circular No. 27.
Issuing authority: Reserve Bank of India, Financial Markets Regulation Department.
Reference: RBI/2026-27/293, 12 October 2026.
Signatory: Dimple Bhandia, Chief General Manager.
Primary source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13739&Mode=0
This article is for informational and educational purposes only and does not constitute legal or regulatory advice. Readers should verify the applicable primary regulatory source before taking action.
