Publication date: 12 October 2026
India’s central bank is tightening the treatment of large corporate currency hedges as it tries to stop protection against rupee weakness from becoming another source of pressure on the currency. The measures address a familiar market feedback loop: firms expecting depreciation buy dollars forward, that demand weakens the rupee further, and the fall encourages still more hedging.
According to Reuters, banks have been asked to maintain reserves against certain large hedges and face tighter limits on the cancellation and rebooking of rupee-linked derivative contracts. The reserve requirement applies to transactions above $2 million that buy foreign currency against the rupee to cover current-account payments. Capital-account transactions, including some investment hedges and repayment of overseas principal, are treated differently.
The intervention follows an exceptional rise in demand. Corporate forward-dollar purchases reached a record $77 billion in September, Reuters reported, around 80 per cent higher than a year earlier. Corresponding forward sales were $41 billion. That imbalance matters because it can increase immediate demand for dollar funding even when the underlying import payment lies in the future.
Hedging is protection, but it can move the market
Currency hedging is normally prudent financial management. Importers use forward contracts to lock in the rupee cost of future dollar payments, protecting budgets and margins from exchange-rate swings. But when many companies seek the same protection at once, their collective behaviour can reinforce the risk they are trying to avoid.
The Reserve Bank of India appears to be distinguishing between genuine risk management and repeated position changes that resemble directional trading. Restricting the rebooking of cancelled contracts makes it harder to use an underlying commercial exposure as the basis for frequent market repositioning. Requiring banks to hold reserves against large transactions also makes those trades more expensive.
Bankers cited by Reuters estimated that hedging costs could rise by 80 to 150 basis points, depending on how much banks pass to clients. That creates a difficult policy trade-off. Higher costs may suppress speculative demand, but they can also discourage importers from fully protecting legitimate exposures. Smaller companies, which usually have less bargaining power and thinner margins, may feel the change most sharply.
Liquidity tools cannot remove the underlying shock
The rupee has faced pressure from high oil prices and foreign outflows from Indian equities. India imports much of its energy, so a rise in oil costs increases the country’s need for dollars and worsens the terms of trade. The central bank has already opened a special dollar window for state oil companies, shifting some of their demand away from the spot market.
Together, the oil-company window and the new hedging rules target two large sources of daily dollar demand. They may improve market functioning and reduce disorderly moves, but they do not change the underlying cost of imported energy or reverse capital outflows. They redistribute when and where dollar demand appears.
The lesson for companies extends beyond India. In a volatile currency market, treasury policy cannot be reduced to buying maximum protection at any price. Firms need staggered hedge maturities, clear links between derivatives and commercial exposures, and governance that distinguishes insurance from market timing. Regulators, meanwhile, must prevent a rush for safety from destabilising the market without leaving businesses dangerously exposed.