RBI's FERR to Counter Rupee Slide

In October 2026, the Reserve Bank of India (RBI) introduced a suite of emergency measures to arrest the slide of the Indian rupee.
The central measure is the Foreign Exchange Risk Reserve (FERR), a 20% reserve requirement on specified rupee-linked forex derivatives.
Economists view it as a reversal of the 'China playbook' on currency management.

Mechanism: RBI imposed a 20% FERR on specified rupee-linked forex derivative contracts involving the purchase of foreign currency against INR.
Coverage: Initially applied to eligible customer contracts exceeding USD 2 million. It was extended to authorised dealers' own hedging contracts, regardless of contract value.
Maintenance: The reserve must be maintained daily with the RBI in cash until the contract ends.
Objective: Make forward dollar protection costlier for domestic banks and traders, thereby curbing speculative and precautionary demand for dollars.
Domestic focus: Targets domestic institutions and onshore traders, not offshore entities, to penalise local activity contributing to self-fulfilling sell-offs.

Higher hedging costs discourage indiscriminate forward-booking of dollars.
Reduces bets against the rupee that can create a feedback loop of depreciation.
Provides artificial support to the domestic exchange rate by choking speculative dollar demand.

Costlier hedging for importers: Firms with genuine dollar liabilities face higher protection costs and greater exposure to volatility.
Only breathing room: Similar to 2013 Taper Tantrum curbs, the measure offers short-term tactical relief.
Long-term dependence: Rupee stability depends on global crude prices and Foreign Portfolio Investment (FPI) flows.
Regulatory unpredictability: Sudden interventions can make market participants wary and disrupt natural price discovery.
Unresolved structural deficit: FERR may not address the Current Account Deficit (CAD), trade imbalances, elevated crude prices, or foreign capital outflows.

FERR adapts a counter-cyclical macroprudential tool used by the People's Bank of China (PBoC).
China's application (to weaken currency): In March 2026, when the yuan was strengthening against the US dollar and hurting export competitiveness, the PBoC cut its FX risk reserve ratio from 20% to zero.
India's reverse application (to strengthen currency): India faces a weakening rupee. By imposing a 20% FERR, RBI makes betting against the rupee financially burdensome.

RBI operates under the RBI Act, 1934; forex management is governed by the Foreign Exchange Management Act (FEMA), 1999.
FERR is a macroprudential measure, distinct from conventional monetary policy.
Relevant concepts: CAD, FPI flows, Taper Tantrum, Masala Bonds, external commercial borrowing, forward markets.

Prelims: FERR mechanism, PBoC tool, rupee defence measures, devaluation effects.
Mains: Currency manipulation, protectionism, external sector stability, macroprudential regulation.

Prelims 2019: Which is not a likely measure to stop rupee slide? Ans: following an expansionary monetary policy.
Prelims 2021: Effects of devaluation — Ans: improves export competitiveness only.
Mains 2018: Protectionism and currency manipulations affecting India's macroeconomic stability.