Banks Request Clarity on RBI’s Foreign Exchange Risk Reserve Implementation

RBI has sought feedback from four leading banks on the impact of the measures announced on Saturday

Banks are asking for operational guidance on how to maintain the newly introduced foreign exchange risk reserve (FERR) with the Reserve Bank of India (RBI).

The FERR was introduced by the RBI as part of its efforts to curb speculation and reduce volatility in the foreign exchange market.

For all rupee‑denominated foreign‑exchange derivative contracts with a notional value above $2 million, authorized dealers must hold with the RBI a cash FERR amounting to 20 % of the INR equivalent of each contract’s notional value.

“The FERR requirement is a novel measure. Although banks are accustomed to managing the cash reserve ratio (CRR), the FERR brings a distinct set of operational challenges,” said a forex dealer at a public‑sector bank.

Banks seek clarity

Banks are seeking clarification on several points: how to pass these costs to importer and exporter clients, the methodology for calculating the cost, the operational steps for setting aside and remitting the required reserves to the RBI, and whether the cost should be uniform across banks or set individually by each institution.

For instance, a $3 million derivative contract (roughly ₹28.73 crore) would require a bank to set aside about ₹5.75 crore with the RBI. Since these funds earn no interest, they represent an added cost that banks may try to recover from clients. The lack of clear guidance on cost calculation and recovery remains a major concern.

Meanwhile, the RBI has requested feedback from four major banks on the impact of the measures announced on Saturday.

The central bank announced several measures: it placed restrictions on re‑booking cancelled foreign‑exchange derivative contracts, lowered the threshold for conducting such transactions without establishing underlying exposure from $100 million to $5 million, introduced the FERR for banks, and required additional documentation to verify underlying exposures.

The RBI alsoopened a special window to meet the entire daily dollar requirements of three public sector oil marketing companies (OMCs) — Indian Oil Corporation Ltd, Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd.

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