The Reserve Bank of India moved to tighten its grip on currency markets on October 10, deploying a new set of rules designed to strangle speculative demand for dollars. The central bank barred authorised dealers from allowing users to rebook cancelled rupee-linked foreign exchange derivative contracts, a direct hit against traders who have been using loopholes to fuel volatility. Rollovers at maturity remain permitted, but the door is now firmly shut on the churning of positions that had been pushing the rupee to historic lows.
The mechanism is blunt. The RBI slashed the threshold for derivative transactions without an underlying exposure from $100 million to just $2 million. To make it sting further, banks must now park a Foreign Exchange Risk Reserve (FERR) with the central bank—cash equal to 20 per cent of the rupee equivalent of any rupee-linked derivative contract exceeding that $2 million mark. This isn't a paper reserve; it's actual liquidity locked away, reducing the money available for lending and forcing banks to price in higher risk.
Kotak Mahindra Bank sees the immediate effect as a lifeline for the currency. "The immediate reaction on INR is expected to be very favourable—likely move of USDINR towards sub-95 cannot be ruled out," the bank's report stated. By making hedging more expensive—estimates suggest a 1-1.6 per cent jump in costs—the RBI is effectively dissuading importers and other market players from piling into forward contracts. IDFC FIRST Bank echoed this, noting that while forward premia will soften, the medium-term trajectory still hinges on external headwinds like crude oil prices and foreign portfolio outflows.
But the ripple effects extend beyond the exchange rate. IDFC FIRST Bank projects that core liquidity surplus in the banking system could plummet from ₹10.4 lakh crore (as of October 2) to around ₹2 lakh crore by March 2027. Kotak Mahindra Bank estimates the new rules alone could withdraw approximately ₹1.5 lakh crore of durable liquidity if they remain in force for another month. This drain is compounded by the RBI's recent open market sale of government securities worth ₹25,000 crore and the hike in the Cash Reserve Ratio maintenance requirement to 99 per cent from 90 per cent.
The central bank’s stance has shifted to "calibrated tightening" following the 25 basis point repo rate hike at its October monetary policy meeting. If the forex measures successfully curb depreciation pressure, the RBI may adopt a gradual approach to further rate increases, with IDFC FIRST Bank expecting the terminal repo rate to land in the 6-6.25 per cent range. For now, the market is watching closely to see if the rupee can hold the sub-95 line as these stricter liquidity controls take full effect.