Tighter derivative rules could curb near-term dollar demand and support the rupee, but analysts warn of higher hedging costs and a potentially sharp squeeze on system liquidity.
The Reserve Bank of India’s latest steps to tighten foreign exchange trading rules could give the rupee some near-term breathing room, even as they put fresh pressure on banking-system liquidity and make hedging more expensive for importers, analysts said. Kotak Mahindra Bank and IDFC First Bank both expect the measures to ease demand for dollars in the spot market and trim forward premiums, though they warned that the rupee’s broader path will still depend on external forces such as crude prices, capital flows and overseas investor sentiment.
According to the circulars issued by the RBI on October 10, authorised dealers can no longer allow users to rebook cancelled rupee-linked foreign exchange derivative contracts. The central bank also sharply lowered the threshold for derivative transactions without underlying exposure to $5 million from $100 million, a move aimed at limiting speculative positioning. In a further tightening, it introduced a Foreign Exchange Risk Reserve, under which banks must hold a cash reserve equal to 20% of the rupee value of eligible derivative contracts above $2 million.
Market participants said those changes are likely to make hedging costlier and less attractive for some oil marketing companies and other importers. Kotak Mahindra Bank estimated that hedging costs could rise by 1% to 1.6%, while IDFC First Bank put the increase at about 1.5%. Both banks said that could discourage some firms from buying dollars in the market, helping to reduce immediate pressure on the rupee and pushing USD/INR lower in the short run. Business Standard reported that the currency closed at 96.73 per dollar on Friday, close to its record low of 96.96 reached on 20 May 2026.
The liquidity effect may be just as significant. Kotak Mahindra Bank said the measures could drain about Rs 1.5 lakh crore in durable liquidity if they remain in force for another month, while IDFC First Bank projected that the core liquidity surplus could shrink to Rs 2 lakh crore by March 2027 from Rs 10.4 lakh crore on October 2. That would add to an already visible tightening in the system: LiveMint reported that the RBI has drained nearly $20 billion from excess rupee liquidity through foreign exchange operations, bond sales and reverse repos, helping cut the banking surplus sharply in recent weeks. Even so, analysts cautioned that high crude prices, portfolio outflows and weak capital inflows could still limit any sustained recovery in the currency.
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