RBI Foreign Exchange Derivatives 2026: New Rules for Banks & Traders

What Happened?

The Reserve Bank of India (RBI) has issued a major circular (RBI/2026-27/291 A.P. DIR Series Circular No. 25) on October 10, 2026, imposing significant restrictions and new compliance requirements on foreign exchange derivative contracts involving Indian Rupee (INR). This circular modifies the existing Master Direction on Risk Management and Inter-Bank Dealings dated July 5, 2016, and applies to all Authorized Dealers (banks) and their users across India.

The key changes include: (1) Complete ban on rebooking of cancelled forex derivative contracts, (2) Drastic reduction of position limits from USD 100 million to USD 5 million equivalent, and (3) Mandatory undertakings and enhanced documentation for hedging activities.

Background & Legal Context

While this circular is issued under FEMA (Foreign Exchange Management Act), 1999 and the Reserve Bank of India Act, 1934, it has critical implications for Indian exporters, importers, and corporates managing foreign currency exposure for Income Tax purposes under the Income Tax Act, 2025.

Here is how it connects to Indian tax law:

• Section 28(i) of Income Tax Act, 2025 – Income from business includes profits or gains from forex derivative contracts. Any hedging loss or gain must be accounted for in your tax returns for Assessment Year 2026-27 (FY 2025-26).
• Section 43 of Income Tax Act, 2025 – Cost of acquisition of forex derivatives is treated as expenditure in computing business income. With these new restrictions, your hedging strategy may change, affecting tax deductibility.
• Section 40 of Income Tax Act, 2025 – Disallowances apply if documentation is not proper. Non-compliance with RBI's new undertaking and documentation requirements may result in tax disallowance.
• Section 115BBE of Income Tax Act, 2025 – For unlisted foreign companies with FDI exposure, forex derivative positions must be tracked separately for tax compliance in India.

The RBI circular is issued under Section 10(4) and 11(1) of FEMA, 1999, which gives RBI binding authority over all Authorized Dealers and users. Non-compliance can attract penalties under FEMA and corresponding Income Tax consequences.

What Does This Mean for You?

For Exporters & Importers:

If you are an exporter or importer hedging your forex exposure, this circular creates a major operational hurdle. Here's why:

• USD 5 million limit instead of USD 100 million – This is a 95% reduction. If your contracted exposure is larger (say, USD 50 million), you can now only hedge USD 5 million without proving underlying exposure. The remaining USD 45 million requires documented proof of contracted exposure.
• No rebooking of cancelled contracts – Previously, if you cancelled a forex derivative contract and the market moved favorably, you could rebook at better rates. This is now completely prohibited. You can only rollover contracts on maturity, not cancel and rebook.
• Double hedging restrictions – You must now obtain an undertaking confirming that you haven't hedged the same exposure with another bank. If you split hedges across two banks (common practice), you must disclose this explicitly in the undertaking.

For Authorized Dealers (Banks):

• Banks must collect and retain undertakings from corporate users at the time of offering forex derivative contracts.
• Each bank is now responsible for verifying underlying exposure and maintaining documentary evidence for minimum 2 years. Non-compliance can attract RBI action.
• Banks cannot offer rebooking facilities, limiting their revenue from these transactions.

Tax Compliance Implications for AY 2026-27:

• If your forex derivatives position closes at a loss, ensure proper documentation exists per RBI requirements. Without it, the loss may not be deductible under Section 43/Section 28(i) of the Income Tax Act, 2025.
• If you were practicing double hedging, you must now disclose this in your tax return and adjust your hedging strategy. This may increase your tax liability if previous hedges are unwound.
• Any rebooking done before October 10, 2026, remains valid. Only new rebookings are banned. However, your tax position for past years should be audited if you claim large hedging losses.

What Should You Do Now?

Immediate Actions (October 2026 onwards):

1. Audit your current forex derivative positions – Check if you have any cancelled contracts that you were planning to rebook. These cannot be rebooked after October 10, 2026. Plan rollovers only on maturity.
2. Review all hedging arrangements across banks – If you hedge with multiple banks, ensure your undertakings to each bank accurately reflect amounts hedged elsewhere. Non-disclosure is a breach of RBI directions and a tax compliance risk.
3. Document your contracted exposure – If any position exceeds USD 5 million, prepare documentary proof of underlying exposure (purchase orders, sales contracts, invoices). Your bank will require this.
4. Communicate with your bank – Discuss the new USD 5 million limit and plan how to restructure large hedges. You may need to increase frequency of rollover contracts on maturity instead of new rebookings.
5. Update your GST compliance – If you are a GST-registered exporter using hedging instruments, note that GST on forex contracts is a separate issue. Ensure your hedging costs are correctly categorized for GST input credit eligibility under the Integrated Goods and Services Tax (IGST) rules.

For Tax Planning (AY 2026-27):

• Review forex derivative losses or gains from FY 2025-26. Ensure all documentation aligns with RBI requirements to avoid Section 40 disallowances.
• Engage a CA to file your returns for AY 2026-27 with proper disclosure of forex positions and compliance with this new RBI circular.
• If you are an NRI or foreign company earning income through forex derivatives in India, ensure you file your tax return (Form ITNS) within 30 days of the end of the financial year, as per Income Tax Act, 2025.

Key Takeaways

• Rebooking banned, rollover permitted – Authorized dealers cannot allow cancellation and rebooking of forex derivative contracts. Only rollovers on maturity are permitted. This directly impacts hedging strategy for businesses with large exposures.
• Position limit halved 20x over – The USD 100 million threshold for taking positions without underlying exposure is reduced to USD 5 million. Large multinational companies and exporters will be significantly impacted.
• Mandatory undertaking required – Every forex derivative contract offered must now include an undertaking from the user that the same exposure has not been hedged elsewhere. Breach can lead to RBI penalties and Income Tax disallowance.
• 2-year documentation retention – Banks must retain all documents proving underlying exposure for minimum 2 years. Non-compliance is an RBI violation and tax risk for both banks and corporate users.
• Tax implications for AY 2026-27 – Forex derivative losses may be disallowed under Section 40 of Income Tax Act, 2025, if documentation doesn't comply with RBI requirements. Proper GST treatment of hedging costs is also critical for exporters.

Effective Date: October 10, 2026 (with immediate effect)

Who Must Comply: All Authorized Dealers (banks offering forex products), all corporate users (exporters, importers, multinational companies), and any individual taking forex positions above USD 5 million equivalent.

Penalty for Non-Compliance: RBI penalties under FEMA, 1999, and potential Income Tax disallowances under Section 40 of Income Tax Act, 2025, plus interest and penalties under Section 201 (failure to comply).

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