The Reserve Bank of India (RBI) has announced a set of emergency measures to stem the slide of the rupee. The central one is the Foreign Exchange Risk Reserve (FERR): a 20% reserve, introduced in October 2026, on specified rupee-linked forex derivative contracts that involve buying foreign currency against the rupee.
The 20% cash reserve first applied to eligible customer contracts above a USD 2 million threshold. It has now been extended to the own hedging contracts of authorised dealers, whatever the value of the contract. The reserve has to be maintained daily with the RBI, in cash, until the contract ends.
The aim is to make forward dollar cover costlier for domestic banks and traders. It is meant to discourage speculative and precautionary forward-booking of dollars to hedge against future rupee depreciation, which itself adds to immediate downward pressure on the currency. The measure targets domestic institutions and onshore traders rather than offshore entities, penalising local market activity that feeds self-fulfilling sell-offs and localised speculative bets.
Economists describe the move as a reversal of the "China playbook" on currency management. The risk reserve ratio is adapted from a counter-cyclical macroprudential tool used by the People's Bank of China (PBoC).
In March 2026, the yuan was continuously strengthening against the US dollar, which hurts China's export competitiveness. The PBoC then cut its FX risk reserve ratio from 20% to zero, removing the cost of betting against its own currency. India faces the opposite situation, a rapidly weakening currency. By imposing a 20% FERR, the RBI has made it financially burdensome to bet against the rupee, curbing speculative demand for dollars and supporting the exchange rate.
The measure has costs. Although aimed at speculators, FERR also penalises firms with genuine dollar liabilities, such as importers, by raising their hedging costs and exposure to market volatility.
The measures are compared to the curbs of the 2013 Taper Tantrum and are seen as offering only short-term breathing room. Long-term stability still depends on global crude prices and Foreign Portfolio Investment (FPI) flows.
Sudden interventions of this kind can make market participants wary and disrupt natural price discovery in the forex market. FERR may also not address underlying pressures such as the Current Account Deficit (CAD), trade imbalances, elevated crude oil prices and foreign capital outflows.
With reference to the Foreign Exchange Risk Reserve (FERR) introduced by the Reserve Bank of India, consider the following statements:
Which of the statements given above are correct?
Consider the following statements:
Statement-I: By imposing a 20% FERR, the RBI has made it financially burdensome to bet against the rupee.
Statement-II: The risk reserve ratio is adapted from a counter-cyclical macroprudential tool used by the People's Bank of China, which cut its ratio from 20% to zero in March 2026 when the yuan was strengthening.
Which one of the following is correct in respect of the above statements?
Consider the following information:
| Measure / Term | Description as per the article | |
|---|---|---|
| 1. | FERR | Targets domestic institutions and onshore traders rather than offshore entities |
| 2. | PBoC's FX risk reserve ratio cut | Done when the yuan was weakening sharply against the US dollar |
| 3. | 2013 Taper Tantrum | Episode whose curbs are compared with the RBI's present measures |
In how many of the above rows is the given information correctly matched?
