RBI Issues Draft Guidelines on Forex Dealings & Announces Major Regulatory Changes

The Reserve Bank of India (RBI) on February 17, 2026, released a draft directions on ‘Foreign Exchange Dealings of Authorised Persons,’ proposing the most significant liberalization of India’s foreign exchange regulations in recent years. These changes, open for stakeholder feedback until March 10, 2026, aim to provide Indian banks and primary dealers with operational flexibility comparable to their global counterparts while maintaining robust regulatory oversight.

RBI Issues Draft Guidelines on Forex Dealings & Announces Major Regulatory Changes

The RBI’s move comes amid increasing volatility in the USD/INR exchange rate influenced by global monetary policy shifts, and growing demand from Indian corporations for sophisticated hedging instruments. Currently, Indian financial institutions operate under restrictions that limit their ability to compete with global centres like London, which offer broader over-the-counter derivative instruments with fewer regulatory encumbrances.

Key Regulatory Changes

1. Expanded Hedging and Market-Making Capabilities

Impact: Banks can now dynamically manage currency exposures without seeking case-by-case regulatory approvals, reducing operational friction and costs.

2. Non-Deliverable Derivative Contracts (NDDCs)

The Reform: Authorised dealers may undertake non-deliverable derivative contracts involving the Indian rupee with other authorised dealers, provided the bank or its parent has an operational IFSC banking unit .

Key Features:

• Cash settlement permitted in rupees or foreign currency
• Enables sophisticated hedging strategies previously unavailable domestically
• Aligns India with practices in major financial centers

Strategic Significance: NDDCs allow market participants to hedge rupee exposure without physical delivery, reducing settlement risks and operational complexity.

3. Electronic Trading Platform (ETP) Integration

Domestic ETPs: Authorised dealers may undertake forex derivative contracts and foreign currency interest rate derivative contracts on RBI-authorised electronic trading platforms.

Overseas ETPs: Transactions on offshore electronic trading platforms permitted subject to critical safeguards:

• ETP operator must be incorporated in a Financial Action Task Force (FATF) member country
• Platform must be regulated by bodies such as IOSCO or CPMI
• Ensures compliance with international anti-money laundering standards

Rationale: This aligns with global trends toward digital trading infrastructure while maintaining safeguards against illicit finance.

4. Treasury Deployment and Foreign Currency Account Flexibility

New Investment Avenues for Surplus Foreign Currency:

Foreign Currency Deposits: Authorised dealers may place and accept foreign currency deposits with:

• Other authorised dealers
• Overseas branches
• IFSC banking units
• Offshore banking units in special economic zones

5. Gold Hedging Provisions

Eligible Entities:

• Designated banks under the Gold Monetisation Scheme, 2015
• Banks permitted to enter forward gold contracts with domestic constituents

Permitted Activities:

• Hedge gold price risk using exchange-traded products in overseas markets
• Use over-the-counter (OTC) hedging products internationally

Critical Safeguard: While using option-based products, banks must ensure there is no net receipt of premium, either direct or implied . This prevents speculative option writing while allowing genuine hedging.

6. Simplified Reporting Requirements

The Change: RBI has updated the format for reporting net open position limits as part of its effort to simplify compliance .

Historical Context: Previous liberalizations, such as those in 2018 regarding derivative rules, led to increased trading volumes but also presented challenges in operational error management for some institutions . The current reforms aim to balance flexibility with streamlined oversight.

7. Extended Market Hours and Expanded Transaction Windows

New Provision: Authorised dealers permitted to transact beyond domestic market hours with:

• Customers
• Other authorised dealers
• IFSC banking units
• Offshore banking units

Benefit: Enables Indian institutions to respond to global market developments in real-time, rather than waiting for domestic market opening.

Risk Considerations: The Balanced Approach

While these reforms promise significant efficiency gains, they concurrently elevate risk profiles for authorised institutions:

Stakeholder Consultation and Implementation Timeline

Market Implications and Forward Outlook

For Banking Institutions

• Competitive parity: Indian banks can now offer forex services comparable to international banks
• Revenue opportunities: Expanded market-making and proprietary trading potential
• Investment requirement: Need for upgraded risk management systems and personnel training

For Corporate Clients

• Enhanced hedging options: Access to sophisticated instruments for managing currency risk
• Better pricing: Increased market liquidity should reduce bid-ask spreads
• 24-hour coverage: Extended dealing hours align with global business needs

For Financial Markets

• Deeper liquidity: More participants and instruments should improve market depth
• Greater integration: Indian forex market becomes more connected with global centres
• Gradual evolution: Measured pace allows institutional adaptation