RBI Announces New Regulatory Measures to Curb Foreign Exchange Market Volatility

In an effort to ensure the orderly functioning of the foreign exchange market amidst evolving geopolitical conditions and fluctuating oil prices, the Reserve Bank of India (RBI) issued two circulars on October 10, 2026, announcing a series of regulatory measures. These interventions are designed to strengthen market discipline and bolster risk management protocols, creating a more transparent and stable environment for currency trading.Among the key directives, the RBI has imposed restrictions on the rebooking of cancelled foreign exchange derivative contracts. Under these new rules, Authorised Dealers (ADs) are no longer permitted to allow users to rebook any derivative contract involving the Indian Rupee—whether deliverable or non-deliverable—if that contract was previously cancelled with any AD following the issuance of the new directions. However, the rollover of contracts upon maturity remains permitted, provided they comply with existing regulatory frameworks.A significant shift has been made regarding the threshold for foreign exchange derivative transactions conducted without establishing an underlying exposure. The RBI has drastically reduced this threshold from $100 million equivalent to $5 million equivalent. This change applies across all Authorised Dealers and encompasses exchange-traded currency derivatives involving the Rupee. Furthermore, ADs are now required to obtain and retain documentation from users confirming that their underlying exposures have not been hedged through any other dealer.The central bank has also introduced a Foreign Exchange Risk Reserve (FERR). For derivative contracts involving the Rupee with a notional value exceeding $2 million, ADs must maintain a cash reserve with the RBI equal to 20% of the Rupee equivalent of the transaction’s notional amount. This reserve requirement specifically applies to contracts used to hedge current account exposures where the user purchases foreign currency against the Rupee.Market experts suggest these changes will have immediate implications for banking operations. Kunal Sodhani, Head of Treasury at Shinhan Bank, noted that the measures are expected to prompt banks to reduce speculative positions and unwind excess exposures. He highlighted that the reduction in the limit for positions without underlying exposure and the restriction on rebooking cancelled contracts should effectively curtail speculative activity. However, he cautioned that the FERR requirement might increase funding and opportunity costs for banks, which could eventually lead to wider spreads and higher hedging costs for customers, particularly for long-tenor transactions.These recent steps follow a broader strategic shift by the RBI. According to Devarsh Vakil, Head of Research at HDFC Securities, the central bank has moved away from relying solely on conventional interest rate hikes—such as the 25bps repo hike on October 7, which did not stabilize the currency—toward structural market interventions. These actions aim to manage volatility more directly through systemic plumbing.Beyond these latest circulars, the RBI has utilized a range of tools to support the Rupee. Ritesh Bhansali, Deputy CEO of Mecklai Financial Services, pointed to other interventions, including the use of sell-buy swaps in the forward market to manage liquidity and the establishment of a dedicated dollar facility for oil marketing companies. Other strategies have included liberalizing external commercial borrowings, encouraging non-resident Indian deposits, and restricting the net open position limits of commercial banks to limit proprietary trading. While these short-term measures aim to provide stability, long-term outcomes remain contingent on external factors, including geopolitical stability, global oil prices, and international interest rate differentials.