The Reserve Bank of India tightened the rules governing rupee non-deliverable derivative contracts (NDDCs), restricting their use by non-resident clients for hedging, and extended a 20% cash Foreign Exchange Risk Reserve (FERR) requirement to banks' own currency hedges.

Under the revised directions, authorised dealers will be permitted to offer rupee-linked NDDCs to non-resident users only for hedging, the RBI said in a notification late Monday. Previously, authorised dealer Category-I banks operating International Financial Services Centre (IFSC) banking units and standalone primary dealers authorised as Category-III dealers could offer such contracts to non-residents without restrictions on purpose.

The central bank has also mandated an FERR for rupee-linked foreign exchange derivative contracts undertaken by authorised dealers to hedge currency risks arising from their own assets and liabilities.

The reserve will apply to all rupee-linked foreign exchange derivative contracts in which the authorised dealer purchases foreign currency against the rupee. It will equal 20% of the rupee equivalent of the notional amount of each contract and must be deposited and maintained in cash with the RBI in India on a daily basis until the contract terminates.

The directions will apply to derivative contracts undertaken after their issuance.

The latest measures follow a series of steps announced by the central bank since Saturday to support the rupee, which has weakened amid elevated crude oil prices and capital outflows. The currency, down more than 6% against the dollar in calendar 2026, rose around 1% on Monday following the RBI's weekend announcements.

Non-deliverable derivatives are settled in cash, typically in dollars, without the physical exchange of rupees. Restricting their use by non-residents to hedging could limit their use for speculative positioning, while the expanded cash reserve requirement could raise the cost of managing currency risks for banks.

Reports said banks had sought relief from the RBI over the 20% foreign exchange risk reserve requirement on derivatives used to hedge current account exposures, requesting it be replaced with a flat fee.The extension of the reserve requirement to banks' own hedges adds to the liquidity and funding costs associated with rupee-linked derivative positions. The impact will depend on banks' exposure, contract sizes and the duration of outstanding positions.