RBI opens dollar window for oil firms, tightens forex derivatives to shore up rupee

The Reserve Bank of India unveiled a comprehensive package of measures on 10 October to ease pressure on the rupee, which is trading perilously close to its all-time low. The central bank will open a special window to meet the entire daily dollar requirements of three state-run oil marketing companies from 12 October, while simultaneously tightening regulations on foreign exchange derivatives.

Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation will access dollars under the facility, with the RBI selling US currency directly through designated banks, the central bank said. Under this arrangement, used during periods of acute currency strain, the central bank provides oil firms with dollars directly from its foreign exchange reserves rather than allowing them to purchase in the spot market, where their substantial demand typically creates volatility.

The rupee closed at 96.73 per dollar on Friday, according to one report, and 96.78 per dollar according to another, barely changed from the previous session and hovering near its all-time weakest level of 96.96 touched in May. The rupee has lost about 7% this year, making it one of the worst performing Asian currencies.

Addressing oil companies’ dollar requirements removes one of the largest sources of demand from the foreign exchange market, which analysts suggested should help reduce volatility. The rupee strengthened by about 0.6% against the dollar in the non-deliverable forward market after the steps were announced, albeit in thin trading, according to a report by the Straits Times citing Reuters.

**Tightening derivative rules**

Alongside the oil company window, the RBI slashed the threshold for undertaking foreign exchange derivative transactions to hedge contracted exposures without establishing the existence of the underlying exposure. The limit has been reduced to $5 million equivalent from $100 million across all authorised dealers, the central bank said. A corresponding reduction has been introduced in exchange-traded currency derivatives involving the rupee, across all recognised stock exchanges taken together.

The RBI also mandated that forex dealers maintain a "foreign exchange risk reserve" equal to 20% of the notional amount of each derivative contract involving the rupee, for transactions with a notional value exceeding $2 million equivalent. The reserve requirement applies to hedging current account exposures where the user purchases foreign currency against the rupee, the RBI said in its circular.

Under the revised rules, authorised dealers will not allow users to rebook any cancelled foreign exchange derivative contracts involving the rupee, whether deliverable or non-deliverable, if the contracts were cancelled with any bank after the directions were issued. Rollover of contracts on maturity will continue to be permitted, subject to existing regulations.

The RBI also introduced a documentation requirement: authorised dealers must obtain and retain an undertaking from users confirming that the same underlying exposure has not been hedged with another dealer.

"The measures are intended to strengthen market discipline and ensure appropriate risk management in the foreign exchange market, while maintaining an orderly and transparent market environment," the RBI said in a statement reported by multiple outlets.

**Bankers and analysts react**

Ashhish Vaidya, head of treasury at DBS Bank, said the measures are intended to curb speculative dollar demand, particularly from importers. "They have done this by introducing a new Foreign Exchange Risk Reserve (FERR) for derivative contracts above $2 million where authorised dealers will have to maintain cash of 20% of rupee equivalent," Vaidya said, as quoted by the Economic Times. He added that the 20% levy will make it more expensive to hedge large dollar transactions and could reduce dollar/rupee premiums.

Anshul Chandak, head of treasury at RBL Bank, called the measures restrictive. "By introducing a 20% FERR, the RBI has made it very difficult for importers to hedge. This additional cash requirement means buying dollars for importers becomes not only very expensive but also heavy on working capital requirements," Chandak said, as reported by the Economic Times. He said the curbs will likely reduce forward premiums and support the spot rupee in the near term.

The central bank is "trying to moderate potentially destabilising derivative demand, improve the integrity of underlying exposure verification and discourage circumvention through multiple transactions or repeated rebooking," a person familiar with the RBI’s thinking said, commenting on condition of anonymity, as reported by the Straits Times.

**Reserve depletion and outlook**

India’s foreign exchange reserves fell by $12.95 billion to $734.60 billion in the week ended 2 October, marking the fourth consecutive weekly decline, according to RBI data cited by the Economic Times. Foreign currency assets fell by $10.66 billion to $604.74 billion, while gold reserves declined by $2.28 billion to $106.41 billion. The latest drop followed an $18.34 billion fall in the previous week, taking reserves about $51 billion below their record high of $785.70 billion touched in early September.

The measures follow more than $140 billion in capital inflows raised through one-off policy steps to encourage overseas foreign exchange deposits and offshore borrowing by state-run firms and banks, as reported by the Straits Times. Yet despite those inflows, sustained central bank intervention and a rate hike earlier this week, the rupee remains under pressure.

Dhiraj Nim, foreign exchange strategist at ANZ Bank in Mumbai, said the steps should temper, but not eliminate, pressure on the rupee. "The underlying drivers, including oil prices and capital flows, remain, and the real test will be how reserves and the rupee behave in the coming week," Nim said, as reported by the Straits Times.

The RBI has raised dollars and hiked its policy rate previously, yet pressure on the currency has persisted throughout 2026, Swarajya magazine noted. The central bank also intervened heavily in the spot market on Friday, selling dollars through large state-owned banks, helping the rupee touch an intra-day high of 96.51, according to the Economic Times, but underlying demand for dollars from companies covering positions persisted.

Some bankers said taking oil marketing companies' demand out of the market is welcome and should have been done earlier, but how long the impact lasts before fundamentals catch up remains to be seen. The oil company window will come into effect from 12 October and remain in place until further notice, the RBI said.