RBI’s latest circular, dated October 10, mandates that banks hold a 20% cash reserve against any rupee‑denominated foreign‑exchange derivative contract whose notional value tops $2 million. "This is in no way a capital control measure," Governor Sanjay Malhotra told Moneycontrol, emphasizing that the rule targets speculative flows rather than investment caps.
The 20% FERR replaces the earlier 10% requirement that only applied to hedging contracts, extending the obligation to all rupee‑denominated derivatives. Analysts note that the jump to 20% doubles the liquidity burden on authorised dealers, which could compress spreads by roughly 10‑15 basis points in the short term.
Despite the tighter reserve, non‑resident investors retain full access to equities, bonds, and corporate debt, and can still use external commercial borrowings for hedging. The RBI said the new rule will not impede capital account transactions, a reassurance that foreign direct investment – which stood at ₹4.6 trillion last year – should stay on track.
Looking ahead, the governor hinted at a possible readjustment of the FERR if rupee volatility exceeds 3% intra‑day, but the central bank has no immediate plans to alter repo rates. Market watchers now gauge whether the reserve ratio will dampen speculative arbitrage without stifling legitimate hedging activity.