RBI allows non-deliverable rupee derivatives for hedging only with 20% daily cash reserve
GS3Economy · S&T · Environment · Security· Monetary policy, RBI & banking· Prelims + Mains·
Currency hedging and monetary policy: a GS3 case study on managing exchange rate volatility.
Why in news
The RBI announced that banks and primary dealers can now offer non-deliverable rupee derivatives only for hedging purposes, requiring a 20% daily cash reserve.
Background
The RBI mandate requires authorised dealers to maintain a 20% cash reserve of the notional amount daily for rupee currency contracts. Non-deliverable derivative contracts are settled in cash, typically in dollars, without physical rupee exchange.
Facts for Prelims
- FactAuthorised dealers must maintain a 20% daily cash reserve of the notional amount for non-deliverable rupee derivatives.
- BodyThe RBI regulates the offering of non-deliverable rupee derivatives by banks and primary dealers.
- FactNon-deliverable derivative contracts are settled in cash, usually in dollars, without rupees changing hands.
- FactThe rupee fell more than 6% during the year prior to the October 2026 announcement.
Prelims practice question
With reference to non-deliverable rupee derivatives, consider the following statements:
- The RBI allows these derivatives to be used for speculative purposes only.
- These derivative contracts are settled in cash, typically in dollars, without physical rupee exchange.
- Authorised dealers are required to maintain a 50% daily cash reserve of the notional amount.
Which of the statements given above is/are correct?
- (a)2 only
- (b)1 and 2 only
- (c)2 and 3 only
- (d)1, 2 and 3
Show answer
Answer: (a) 2 only — Statement 2 is correct. Statement 1 is incorrect: The RBI allows these derivatives only for hedging purposes. Statement 3 is incorrect: The RBI mandate requires a 20% daily cash reserve.
For Mains
Q. Examine the role of non-deliverable derivatives and central bank reserve requirements in managing currency volatility and capital outflows in an emerging economy.
Dimensions to cover in your answer
- Liquidity management: Balancing the cost of 20% daily cash reserves against the necessity of hedging current-account exposures.
- Market intervention: The trade-off between restricting speculative derivative use and maintaining deep, liquid currency markets.
Keywords: Monetary Policy · Currency Hedging · Non-deliverable Derivatives · Capital Outflow · Foreign Exchange Risk
More Economy notes
- Adani Enterprises and Jabil Inc. sign MoU for 50:50 AI equipment joint venture · 13 October 2026
- NTPC plans green hydrogen hub in Visakhapatnam using carbon dioxide from Simhadri power station · 13 October 2026
- Karnataka Tourism Department announces new policy to harness ecosystem for tourism start-ups · 13 October 2026
- NPCI delays 0.4% fee on UPI transactions over ₹2,000 after retailer pushback · 13 October 2026
- Nirmala Sitharaman says RBI will continue efforts to prevent rupee volatility · 13 October 2026
- RBI extends derivative transaction curbs to support rupee against high oil prices · 13 October 2026
Something wrong, or something missing?
Spotted a mistake in a note, or want a topic, format or PDF that would help your preparation? Write to us. We read every mail and fix errors fast.
This note is generated automatically from SatyaDheesh's news feed and mapped to the UPSC CSE syllabus. Check facts against the original report or PIB before using them in an answer.