Reserve Bank of India clarifies forex risk reserve rules as foreign inflows lift payments surplus

The Reserve Bank of India has issued detailed guidelines clarifying its new Foreign Exchange Risk Reserve requirements for currency derivatives, as official figures showed a sharp expansion in the country's balance of payments surplus and a narrowing current account deficit.

Under the new clarifications, the central bank confirmed that a 20 per cent un-indexed cash reserve requirement will apply only to specified derivative contracts where clients purchase foreign currency against the Indian rupee with a notional value exceeding $2 million. Transactions involving $2 million or less, user contracts hedging capital account exposures, and trades where clients sell foreign exchange against the rupee remain exempt from the requirement.

The regulatory clarity arrives alongside robust economic figures demonstrating the resilience of India's external finances. Official data released by the central bank showed India recorded an overall balance of payments surplus of $45.4 billion in August 2026, reversing a $5.6 billion deficit from the same month last year.

Strong foreign inflows strengthen external position

The turnaround in external accounts was driven by strong overseas capital inflows following strategic measures implemented by the central bank to fortify national financial stability. Banking capital inflows surged to $64.7 billion during August, propelled by net non-resident Indian deposits, which rose to $83 billion compared to $1 billion in August 2025.

Foreign direct investment and portfolio flows also returned to positive territory, reinforcing broader economic confidence.

Cumulative figures for the April to August period showed an overall balance of payments surplus of $58 billion, compared to a $0.8 billion deficit during the same period in 2025. The current account deficit for August narrowed to $5.2 billion, supported by a growing services trade surplus of $16.5 billion and a modest reduction in the merchandise trade gap.

Rules target specific currency hedging exposures

To manage currency risk and protect the rupee, the RBI introduced the Foreign Exchange Risk Reserve framework through directives issued on 10 and 12 October 2026. Authorised dealers must maintain a 20 per cent daily non-interest-bearing reserve with the central bank against eligible contracts.

The RBI clarified that current account outflows arising from underlying capital account positions — such as external commercial borrowing interest, non-resident debt coupons, and overseas dividend payments — are excluded from user reserve obligations.

Banks must submit daily reports covering eligible derivative positions through the central bank's Centralised Information Management System by 5 pm on the following working day. The central bank added that banks must ensure transactions are not artificially structured to bypass the $2 million threshold.