RBI Rupee Defence: Hedging Costs Up 1.5% for USD/INR

New Reserve Bank of India curbs on rupee derivatives could take some depreciation pressure off USD/INR, according to research from Kotak Mahindra Bank and IDFC FIRST Bank. The RBI rupee defence also removes cash from the banking system: Kotak estimates about Rs 1.5 lakh crore of durable liquidity could be withdrawn if the steps stay in place for another month.

Key Takeaways

Higher hedging costs: Kotak estimates hedging costs could rise by 1-1.6%, while IDFC FIRST Bank puts the increase at around 1.5%.
Tighter derivative rules: The RBI lowered the limit for FX derivative trades without an underlying exposure to USD 5 million from USD 100 million.
Shrinking liquidity surplus: IDFC FIRST Bank sees core liquidity surplus falling to around Rs 2 lakh crore by March 2027 from Rs 10.4 lakh crore on October 2.

What Happened

The RBI issued circulars on October 10. Authorised dealers can no longer let clients rebook rupee-linked FX derivative contracts that were cancelled. Rollovers at maturity are still allowed under existing rules.

The central bank also created a Foreign Exchange Risk Reserve (FERR). Authorised dealers must park 20% of the rupee value of each contract's notional amount with the RBI in cash. This applies to contracts above USD 2 million that hedge current account exposures involving the purchase of foreign currency against the rupee.

The package also includes a dollar window for oil marketing companies (OMCs), routed through designated banks. The RBI said the steps aim to strengthen market discipline and risk management while keeping the FX market orderly and transparent.

Kotak described the likely immediate reaction in the rupee as very favourable, but warned that the global backdrop remains uncertain. IDFC FIRST Bank said the measures are expected to lower USD/INR in the near term, along with forward premiums.

Background

The RBI raised the repo rate by 25 basis points at its October policy meeting and moved to a stance of calibrated tightening. The FX curbs follow that rate move.

The central bank has also tightened liquidity. It lifted the daily Cash Reserve Ratio (CRR) maintenance requirement to 99% from 90% after reviewing liquidity conditions. This came after earlier operations that drained cash.

Market Impact

USD/INR: The reports said the measures are expected to reduce spot dollar demand and curb speculative positions against the rupee. USD/INR stood at 96.6500 (ECB reference rate, 12 October 2026).
Forward premia: Kotak expects premia to soften as hedging by OMCs and other importers is contained. Higher FERR costs could also discourage some importers from hedging at all.
Indian rate expectations: IDFC FIRST Bank said that if the steps ease depreciation pressure, the RBI could take a gradual approach to further rate hikes.
Rupee liquidity: IDFC FIRST Bank said currency leakage and balance-of-payments pressures add to the effect of the RBI's own liquidity operations.

What to Watch Next

Crude oil prices: IDFC FIRST Bank flagged elevated crude as a factor that could keep the rupee under pressure despite the curbs.
Foreign portfolio flows: Continued outflows and weak underlying capital flows could limit the relief, the bank said.
Further liquidity operations: The RBI has announced a Rs 25,000 crore sale of government securities for October. Kotak expects more withdrawal through bond sales and FX intervention.

Bottom Line

The RBI is going after speculative and hedging demand for dollars through higher costs and tighter rules. Both banks said the measures could ease near-term pressure on USD/INR. Both also said global factors and balance-of-payments dynamics will shape the medium-term path.

RBI rupee defence may drain liquidity and ease USD/INR pressure