Banks are engaging with the Reserve Bank of India to modify the recently introduced 20% cash deposit mandate for forex hedging. Lenders warn that the rule, aimed at stabilizing the rupee, could lock up over ₹60,000 crore in liquidity and creates operational burdens. This could impact bank treasury operations and corporate hedging costs if the RBI does not adjust the current framework.
Following the Reserve Bank of India's decision on October 10, 2026, to implement new measures to defend the rupee, banking institutions have begun formal discussions to seek relief from specific requirements. The central bank introduced a 'Foreign Exchange Risk Reserve' (FERR) to curb volatility, which mandates that authorized dealer banks maintain a 20% cash deposit with the RBI for rupee-linked forex derivative contracts used to hedge current-account transactions exceeding $2 million.
Financial institutions, represented by the Foreign Exchange Dealers' Association of India (FEDAI), have raised concerns regarding the liquidity impact of this mandate. Industry estimates suggest that the requirement could lock up between ₹60,000 crore and ₹1.5 lakh crore within the banking system. Banks argue that such a significant withdrawal of liquidity is unnecessary and could tighten treasury operations, potentially affecting the availability of funds for other market activities.
Beyond liquidity, banks are highlighting operational difficulties. The $2 million threshold for these deposits has created a risk where corporate clients might split large hedging orders into smaller, sub-threshold transactions to avoid the reserve requirement. Banks contend that they lack the authority and the resources to effectively audit individual client strategies to prevent this, creating a compliance headache for lenders.
To address these issues, banks have proposed an alternative to the central bank. Instead of a mandatory 20% cash deposit, they are suggesting a direct, flat, paisa-based fee structure for corporate entities hedging their exposures. Industry representatives believe this approach would increase the cost of hedging for companies without causing the friction associated with draining liquidity from the banking system.
The industry is also seeking further clarity on the scope of the new rules, particularly regarding interest payments on foreign-currency loans, which remain ambiguous under the current notification. As global geopolitical tensions and elevated oil prices continue to put pressure on the rupee, the RBI's focus remains on stability. However, the effectiveness of these measures is being closely monitored by market participants.
Investors should track whether the RBI provides any concessions or clarifications in the coming days. Any adjustment to the cash deposit rule could alleviate liquidity pressures, while a strict adherence to the current mandate may lead banks to pass on higher hedging costs to corporate clients, potentially impacting margins for firms with significant foreign currency exposure.