RBI puts a 20% cash rule on large dollar hedges

Economy No. 59 11 October 2026 · 3 min read

On October 10, 2026, the RBI told banks to keep cash equal to 20% of certain large forex derivative contracts with it. The rule applies when customers buy dollars or other foreign currencies using rupees to pay for imports and other current expenses. It applies to contracts worth more than $2 million. Banks must keep this cash with the RBI until the contract ends.

Imagine an importer who needs to pay $10 million 6 months from now. They worry that the rupee could weaken, making those dollars more expensive. So, they sign a forward contract with a bank to lock in the exchange rate today. Under the new rule, the bank must now set aside cash against this contract, making the hedge more expensive to provide.

The rule applies only one way. Importers buying dollars are affected, but exporters selling dollars are not. Hedges linked to loans or investments are also excluded. Neither does the rule apply to contracts signed before October 10, 2026. The RBI is targeting contracts used to lock in the cost of future foreign currency payments.

Here's how the cost adds up. An importer hedging $10 million at ₹96.31 per dollar, the exchange rate on October 2, 2026, has a contract worth ₹96.31 crore. The bank must set aside 20% of this amount, or ₹19.26 crore, with the RBI. The circular does not say whether this cash earns interest. Assuming it earns nothing, the bank loses the chance to earn interest on that money elsewhere. At the repo rate of 5.50%, set on October 7, this works out to roughly ₹1.06 crore a year, or 1.1% of the contract value.

The bank may pass this cost on to the importer through higher hedging charges. Customers also cannot split the same hedge across multiple banks just to keep each contract below the $2 million limit.

Why is the RBI doing this now? The rupee weakened from ₹88.69 per dollar on October 1, 2025, to ₹96.31 on October 2, 2026. It is now just 0.5% away from its weakest level, recorded on May 20, 2026. Forex reserves had fallen to $734.6 billion by October 2, $51.1 billion below their September 4 peak. The RBI had also sold $136.8 billion in dollar forwards by the end of July and $200.1 billion by the end of August.

The logic is simple. When businesses expect the rupee to weaken, they try to lock in dollar prices before they rise further. The RBI is making this protection more expensive in the hope of reducing demand for dollar hedges and easing pressure on the rupee.

But hedging also helps businesses manage uncertainty. If protecting against a weaker rupee becomes more expensive, importers may face higher costs, which could eventually be passed on to customers.

The RBI isn't stopping businesses from buying dollars. It's making it more expensive for importers to lock in dollar prices in advance, while leaving exporters who sell dollars largely unaffected.

Line chart of rupees per US dollar on each trading day from 1 October 2025 to 2 October 2026, by the US Federal Reserve's H.10 rate: from ₹88.69 to ₹96.31, with the weakest ever, ₹96.82 on 20 May 2026, marked.

Table of 6 kinds of rupee forex hedge and whether the RBI's Foreign Exchange Risk Reserve of 10 October 2026 applies: only an importer buying dollars forward above $2 million carries 20% in cash at the RBI; smaller hedges, exporters selling dollars, capital account hedges, contracts signed before 10 October and interbank deals carry none.

Table of the 6 steps the RBI took from 7 to 12 October 2026: repo rate 5.25% to 5.50%, daily minimum CRR 90% to 99%, hedging without paperwork $100 million to $5 million, rebooking cancelled hedges banned, a 20% cash reserve on dollar-buying hedges above $2 million, and dollars sold straight to Indian Oil, HPCL and BPCL.

Bar chart of the net dollars the RBI had sold forward at the end of each month: US$ 57.9 billion in July 2025, US$ 103.1 billion in March 2026, US$ 103.3 billion in June, US$ 136.8 billion in July and US$ 200.1 billion in August 2026.

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