RBI eases forex rules for banks, allows related-party hedging under $100 mn exposure cap

MUMBAI: The Reserve Bank of India (RBI) on Monday eased parts of its forex rules for banks, allowing certain related-party hedging transactions to continue and clarifying that they will not be treated as speculative trades.

Banks can continue undertaking back-to-back hedging transactions, including across overseas branches, as long as they are genuine risk-offsetting trades. The overall $100 million net open position (NOP) limit remains unchanged, and the revised rules take effect immediately, RBI said in a circular.

The central bank has also allowed banks to retain existing positions within the $100 million cap until maturity, or modify them if required, removing the need for premature unwinding.

“If it’s a genuine back-to-back hedge, you can continue to do that… the related party restriction won’t apply,” Anindya Banerjee, head of research for foreign exchange and interest rates at Kotak Securities said.

The NOP limit defines the maximum unhedged foreign exchange exposure a bank can carry and is used by the RBI to curb excessive currency speculation and maintain market stability.

The move follows a series of tightening measures over the past month. On 27 March, the RBI capped banks’ net open positions in the domestic market at $100 million at the end of each business day. On 1 April, the central bank further tightened rules by restricting related-party transactions, including offsetting trades between domestic and overseas branches.

Those steps had aimed to curb one-sided positioning in the rupee and tighten control over speculative flows in the foreign exchange market.

The Indian rupee fell 11% against the US dollar in FY26, and has since recovered nearly 2% after the RBI tightened NOP rules for banks.

The restrictions, however, created operational challenges for banks that routinely execute back-to-back hedges to transfer risk across entities, with such transactions effectively being treated as speculative despite staying within overall limits.

“What will the bankers do with their existing trade, which is within $100 million, but it’s a related party… plus, they may have back-to-back hedges too,” Banerjee said, highlighting the ambiguity that prompted industry representations.

RBI has now drawn a clear distinction between speculative trades and genuine hedging activity. Back-to-back hedges, where risk is offset rather than created, will be allowed even if they involve related parties, and banks will not be required to prematurely unwind existing compliant positions, effectively providing a transition window without disrupting treasury operations.

“Banks’ NOP limit is below $100 million…it’s not going to impact the market anyway. So the RBI said that I’ll give you some relief,” Banerjee said.