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Banks Seek Clarity From RBI on FCNR(B) Interest Hedges Under New Forex Rules
M
Moneycontrol•14-10-2026, 17:30
Banks Seek Clarity From RBI on FCNR(B) Interest Hedges Under New Forex Rules
- •Banks are seeking clarity from the RBI on whether hedges against interest payments on FCNR(B) deposits attract the expanded Foreign Exchange Risk Reserve under new forex rules.
- •The uncertainty follows RBI directions aimed at curbing speculative activity, which require lenders to set aside cash equivalent to 20 percent of eligible derivative contracts.
- •Lenders are concerned about higher hedging costs, liquidity constraints, and how underlying transactions are classified between capital and current account.
- •Banks also need guidance on how to calculate and recover the cost of maintaining the reserve, which could potentially be passed on to businesses through wider spreads.
Key Questions Answered
Banks are seeking clarity on whether hedges against interest payments on FCNR(B) deposits will be subject to the Reserve Bank of India's expanded Foreign Exchange Risk Reserve (FERR) regulations.
The RBI barred the rebooking of cancelled rupee-linked derivative contracts while permitting maturity rollovers, reduced the unhedged forex derivative position threshold from $100 million to $5 million, and introduced FERR for client derivative contracts exceeding $2 million.
FERR requires banks to set aside cash equal to 20 percent of the rupee value of eligible derivative contracts with the RBI until termination. This ties up lendable funds and could increase hedging costs for businesses through wider spreads.
