RBI and FEMA

What are the RBI rules for exporters hedging foreign exchange risk?

Author:: Editorial team, serviceexportguide.com
Verified by:: Editorial team
Published: 28 October 2026
Last modified: 30 October 2026
Reading time: 8 min read

Short answer

Exporters hedge under RBI's Master Direction on Risk Management and Inter-Bank Dealings, updated as on 1 October 2026.¹ Banks may offer deliverable INR derivatives such as forwards only for hedging.¹ From 10 October 2026, Circular No. 25 bars rebooking of cancelled INR derivative contracts.² The same circular cut the no-documentation limit for contracted exposure to USD 5 million.²

Applies to	Governed by	Deadline	Penalty	Last verified
Residents other than Authorised Dealers hedging foreign exchange exposure, including exporters	Master Direction - Risk Management and Inter-Bank Dealings, Part A, Section I¹	Hedge tenor may not exceed the tenor of the exposure¹	Not applicable	28 October 2026
Users cancelling INR derivative contracts	A.P. (DIR Series) Circular No. 25, 10 October 2026²	Effective from 10 October 2026²	Cancelled contracts cannot be rebooked with any bank²	28 October 2026
Contracts above USD 2 million hedging purchases of foreign currency	A.P. (DIR Series) Circular No. 26, 10 October 2026³	Not applicable	Bank keeps a reserve of 20% of the rupee notional with RBI³	28 October 2026

An exporter that books a forward contract with its bank is using a foreign exchange derivative, and RBI decides who may offer it, to whom, and for what purpose.¹ In October 2026 RBI tightened several of the rules through three circulars.²³⁴

This page sets out the rules as they stand in late October 2026.¹²³⁴ It does not say whether any exporter should hedge. For how a forward contract works day to day, see forward contracts for exporters.

What are the RBI hedging rules for exporters?

The RBI hedging rules for exporters are in the Master Direction - Risk Management and Inter-Bank Dealings, issued on 5 July 2016 under the Foreign Exchange Management Act, 1999 (FEMA) and updated as on 1 October 2026 (the Master Direction).¹ Part A, Section I covers facilities for persons resident in India other than Authorised Dealers.¹

Hedging: the Master Direction defines hedging as undertaking a foreign exchange or foreign currency interest rate derivative "to offset the impact of an anticipated or a contracted exposure".¹
Contracted exposure: arises from a transaction already entered into, such as an invoice raised on a foreign client.¹
Anticipated exposure: arises from a transaction proposed to be entered into, such as expected billings under a retainer.¹

Deliverable derivatives involving the rupee may be offered to users only for hedging.¹

Who do the RBI hedging rules apply to?

The RBI hedging rules apply to every user, meaning any person other than an Authorised Dealer, and banks classify every user as retail or non-retail before offering derivatives.¹

Entity type	Classification	Why	Best for
Freelancer, agency, consultancy or mid-sized IT firm	Retail user	A resident is non-retail only with net worth of at least ₹500 crore or turnover of at least ₹1,000 crore in its latest audited financial statements¹	Plain forwards, swaps and purchased options
Large exporter above the ₹500 crore or ₹1,000 crore thresholds	Non-retail user	Meets the net worth or turnover test¹	Covered options and other structures, with no leveraged derivatives
Financial institution or regulated fund	Non-retail user	Classified as non-retail by the Master Direction¹	Institutional hedging
Retail user with risk management capability	Non-retail on request	A retail user can ask to be treated as non-retail if the bank is satisfied about its risk management capability¹	Exporters with a treasury function

Nearly all freelancers, agencies and consultancies fall in the first row.¹

How does an exporter book a hedge under the RBI rules?

An exporter books a hedge by matching a permitted product to a real exposure, and the bank must check four conditions for each deliverable INR contract.¹

Exposure: identify whether the exposure is contracted or anticipated.¹
Classification: confirm whether the bank treats you as a retail or non-retail user.¹
Product: choose a product the bank may offer your category.¹
Amount and tenor: keep the notional amount and tenor within the value and tenor of the exposure.¹
Undertaking: for a contracted exposure, give the bank an undertaking that the same exposure has not been hedged with any other bank, giving amounts already booked elsewhere if the exposure is split.²

For each contract, the bank must ensure that:¹

No double hedge: the same exposure has not been hedged with another derivative.
Within exposure: the notional amount and tenor do not exceed the value and tenor of the exposure.
Adjustment: if the exposure falls away in whole or part, the hedge is adjusted, unless the change is not material or is due to market value movements.
Estimates: where the exposure's value is not certain, the contract is booked on reasonable estimates that are reviewed periodically.

For an exporter, the tenor point links to FEMA: services must be realised within nine months from the invoice date, or twelve months if invoiced or settled in rupees.⁵

Which products and limits apply to exporters' hedges?

A bank may offer a retail user forwards, swaps and purchased options, and from 10 October 2026 the limit for hedging contracted exposure without proving the underlying is USD 5 million.¹²

Product or limit	Who can use it	Rule	Best for
Foreign exchange forward	Retail and non-retail users	Master Direction¹	Fixing the rate on a known receipt
Foreign exchange swap and currency swap	Retail and non-retail users	Master Direction¹	Exposures the bank agrees suit a swap
Purchase of a European call or put option	Retail and non-retail users	Master Direction¹	Retail users wanting an option-based hedge
Purchase of a call spread or put spread	Retail and non-retail users	Master Direction¹	Retail users wanting a spread-based hedge
Covered options and other structures	Non-retail users only, with no leveraged derivatives	Master Direction¹	Large exporters
Contracted exposure without proving the underlying	All users	USD 5 million equivalent of notional value outstanding across all banks, from 10 October 2026²	Small hedges on invoices already raised

When offering a derivative to a retail user, the bank must show the mid-market mark or bid and ask price before the deal and include it in the confirmation or term sheet.¹ The same USD 5 million applies to exchange-traded currency derivatives involving the rupee.²

What happens if an exporter cancels or over-hedges a forward contract?

If an exporter cancels an INR derivative contract from 10 October 2026, no bank may let it rebook that contract, and if the exposure falls away the hedge must be adjusted.¹²

Cancellation: a bank must not permit users to rebook any rupee foreign exchange derivative, deliverable or non-deliverable, that has been cancelled with any bank. Before this, the Master Direction let users freely cancel and rebook.¹²
Rollover: banks may continue to let users roll over contracts on maturity, subject to the Master Direction.²
Exposure falls away: the hedge is adjusted, unless the change is not material or is due to market value movements.¹
Anticipated exposure gains: net gains on contracts hedging an anticipated exposure are passed on only when the underlying cash flow happens, and pro rata on part delivery.¹

For example, a design agency hedging expected retainer billings that end early would see the hedge adjusted, and any net gain passed on only as the underlying cash flow happens.¹

Which RBI rules govern hedging by exporters?

Part A, Section I of the Master Direction sets the hedging rules, and three circulars amend them from October 2026.¹²³⁴

Rule	Clause or scope	Date	Plain meaning	Best for
Master Direction - Risk Management and Inter-Bank Dealings	Part A, Section I, paragraphs 1 to 3	5 July 2016, updated as on 1 October 2026¹	Who may hedge, with which products, on which conditions	Every exporter that hedges
A.P. (DIR Series) Circular No. 25	Rebooking, threshold and undertaking	10 October 2026²	No rebooking of cancelled INR derivatives; threshold without proving the underlying cut to USD 5 million; new undertaking from users	Exporters with existing or planned forwards
A.P. (DIR Series) Circular No. 26	Foreign Exchange Risk Reserve	10 October 2026³	Reserve on certain contracts where the user buys foreign currency	Importers and banks
A.P. (DIR Series) Circular No. 27	INR non-deliverable contracts and banks' own hedges	12 October 2026⁴	INR non-deliverable contracts for non-residents only for hedging; reserve on banks' own hedges	Non-residents and banks

Contracts booked under earlier directions may continue until expiry.¹

What changed in the RBI hedging rules on 10 October 2026?

A.P. (DIR Series) Circular No. 25 made three changes, effective immediately:²

No rebooking after cancellation: no rebooking of any rupee foreign exchange derivative cancelled with any bank.²
Rollover still allowed: banks may continue to let users roll over contracts on maturity.²
Lower no-documentation threshold: the limit for hedging contracted exposure without having to establish the underlying exposure fell from USD 100 million to USD 5 million equivalent of notional value outstanding, across all banks.²

Banks must keep the supporting documents for at least two years.²

Which contracts does the Foreign Exchange Risk Reserve in Circular No. 26 cover?

A.P. (DIR Series) Circular No. 26 requires banks to keep a Foreign Exchange Risk Reserve with RBI equal to 20% of the rupee notional of certain contracts.³

Covered contracts: contracts above USD 2 million equivalent that hedge current account transactions where the user is purchasing foreign currency against rupees, such as an importer paying a supplier.³
Exporters: a service exporter hedging receipts sells foreign currency, which is the opposite direction to the one described.³
Circular No. 27: extends a similar reserve to banks' own hedges and restricts rupee non-deliverable contracts for non-residents to hedging.⁴

What are the common mistakes with RBI hedging rules for exporters?

The common mistakes are planning to cancel and rebook, hedging the same invoice twice, and booking tenors longer than the export's realisation period.¹²⁵

Cancel and rebook: from 10 October 2026 a cancelled INR derivative cannot be rebooked with any bank.²
Double hedging: the undertaking to the bank confirms the exposure is not hedged elsewhere.²
Long tenors: a hedge tenor beyond the nine-month realisation period for services exceeds the exposure.¹⁵
Unchecked bank terms: not asking the bank how it now treats early delivery, cancellation and rollover of an existing contract, which documents it wants for contracted and anticipated exposures, and how it shows the mid-market mark on your confirmation.¹²

For decisions about whether and how much to hedge, speak to your bank's treasury desk or a chartered accountant; this page explains only the rules.

How did we verify this?

We checked this page against the sources below on 30 October 2026. Read our methodology or report an error.

Frequently asked questions

Which RBI instrument governs forward contracts for exporters?+

Forward contracts for exporters are governed by the Master Direction - Risk Management and Inter-Bank Dealings dated 5 July 2016, updated as on 1 October 2026. It is read with A.P. (DIR Series) Circulars No. 25 and 26 of 10 October 2026 and No. 27 of 12 October 2026.¹²³⁴

Can I cancel a forward contract and book a new one later?+

An exporter can still cancel a forward contract, but from 10 October 2026 a bank may not let any user rebook an INR derivative contract that has been cancelled with any bank, under A.P. (DIR Series) Circular No. 25. Rollover of contracts on maturity is still allowed.²

How much can I hedge without showing documents?+

From 10 October 2026, an exporter can hedge contracted exposure up to USD 5 million equivalent of notional value outstanding across all banks without establishing the underlying exposure. You must still have a genuine unhedged exposure and be able to prove it if asked.²

Can a freelancer or small agency hedge foreign currency receipts?+

A freelancer or small agency can hedge. A user is any person other than an Authorised Dealer, and a resident without ₹500 crore net worth or ₹1,000 crore turnover is a retail user who can be offered forwards, swaps and purchased European options.¹

Does the new Foreign Exchange Risk Reserve apply to exporters?+

The Foreign Exchange Risk Reserve in Circular No. 26 applies to contracts above USD 2 million hedging current account transactions where the user is purchasing foreign currency against rupees.³ An exporter selling foreign currency forward is on the other side of that description, so the reserve is aimed at contracts like an importer's.

How long must banks keep hedge documents?+

Under A.P. (DIR Series) Circular No. 25 of 10 October 2026, banks must keep the supporting documents for hedges for at least two years.² Keep your own copies of invoices, contracts and the undertaking you gave, so you can prove the underlying exposure if the bank asks.

This page is general information for Indian service exporters, not tax or legal advice. Rules change and outcomes depend on your facts, so confirm with a chartered accountant before acting.

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