The Context: Why the RBI Stepped In
The Indian rupee has been under pressure.
The Reserve Bank of India (RBI) has been intervening heavily, but volatility persisted. On October 10, 2026, the central bank announced two circulars (A.P. DIR Series Circulars 25 and 26) aimed at restoring order to the foreign exchange market. These measures target speculative activity, strengthen risk management, and, as a side effect, tighten banking system liquidity.
The RBI introduced three key changes with immediate effect:
The rebooking restriction directly targets speculative churn. Previously, traders could cancel a hedge and book a fresh one, often to roll a dollar-long position without a genuine underlying exposure. Now, once cancelled, that contract cannot be replaced. This reduces the ability to take speculative bets on the rupee’s direction.
Kotak Mahindra Bank expects the immediate reaction to be favourable, potentially pushing USD/INR towards sub-95 levels. The logic is straightforward: less speculative dollar buying eases pressure on the spot market. However, the bank cautions that the global environment remains uncertain, suggesting this relief could be transient if external factors like crude oil prices or foreign portfolio investor (FPI) outflows reassert themselves.
This dramatically shrinks the room for large players to take positions without documenting a real exposure. While the circulars do not quantify the speculative share of the market, this move forces larger participants to align their trades with genuine commercial risks. It effectively closes a loophole that allowed significant dollar demand to build without a corresponding import or export need.
The FERR requirement is a new cost for banks. They must lock up 20% of the notional value of qualifying contracts in cash with the RBI. This cash earns no return, creating a funding cost for the bank.
Banks are expected to pass this cost to clients, primarily importers and oil marketing companies (OMCs). A higher hedging cost makes forward dollar cover more expensive. This should reduce the volume of forward hedges, particularly from OMCs and other large importers. As Kotak notes, this containment of hedging demand is likely to soften forward premiums.
The forex measures have significant implications for banking system liquidity. Kotak estimates the new rules could withdraw around ₹1.5 lakh crore of durable liquidity if sustained for another month.
This liquidity withdrawal comes from two main sources. First, the FERR directly moves cash from banks to the RBI. Second, the overall reduction in speculative and hedging activity reduces the need for banks to hold dollars, which in turn reduces the rupee liquidity they manage.
The RBI has complemented these measures with other liquidity-tightening steps. The daily maintenance requirement for the Cash Reserve Ratio (CRR) was raised to 99% from 90%, meaning banks must hold nearly their entire required CRR balance with the RBI every day, leaving less room for intra-day flexibility. Additionally, the RBI announced an open market sale of government securities worth ₹25,000 crore for October. These moves work in tandem with the forex rules to absorb surplus liquidity from the system.
The RBI’s forex measures arrive alongside a shift in monetary policy.
IDFC FIRST Bank suggests that if the forex measures successfully curb speculative demand and ease rupee depreciation, the RBI could adopt a more gradual approach to further rate hikes. The bank sees the terminal repo rate in the 6–6.25% range. The logic is that a stable rupee reduces imported inflation risks, lessening the need for aggressive rate increases. Conversely, if the measures fail and external pressures persist, the RBI may need to rely more heavily on rate hikes to defend the currency.
Both Kotak and IDFC FIRST Bank highlight that the relief from these regulations could be limited by external factors. IDFC FIRST points to elevated crude oil prices, FPI outflows, and weak underlying capital flows as persistent risks. Kotak echoes the uncertainty of the global environment.
The forex derivative rules primarily address speculative and hedging-driven demand. They do not change the fundamental dollar demand arising from India’s import bill, particularly for crude oil, which constitutes about 80% of India’s oil needs. Nor can they stop FPI outflows if global risk sentiment turns negative. Balance-of-payments dynamics—specifically the current account deficit and its financing—will ultimately shape the medium-term trajectory of the rupee.
There are potential feedback loops to consider. Higher hedging costs might lead some importers to reduce their hedge cover, leaving them more exposed to spot market volatility. If the rupee weakens despite the regulations, these unhedged importers could add sudden dollar demand at settlement dates, creating new pressure points.
For corporates, the rebooking ban reduces flexibility. CFOs have noted that while the move strengthens market discipline, it also raises the cost of managing currency risk. If a business need changes, a company can no longer easily cancel and rebook a hedge. It must either roll over the contract at maturity or manage the exposure in the spot market. This could lead to more conservative hedging strategies and potentially higher costs for businesses.
The RBI’s October 10 circulars represent a significant tightening of the foreign exchange derivatives framework. They are designed to bring discipline, curb speculation, and support the rupee. In the near term, banks expect a favourable reaction in USD/INR and softer forward premiums. However, the durability of this relief will depend on factors beyond the RBI’s direct control: crude oil prices, global capital flows, and the broader balance-of-payments situation. While the new rules have made speculative bets more expensive and less flexible, they have not altered the fundamental demand-supply equation for dollars in the Indian economy.
