India's central bank tightens currency-hedging rules and opens a dollar window for state oil companies

Analysis

Oil companies are among the biggest buyers of dollars in India, so supplying them directly from central-bank reserves takes demand out of the open market, though it draws down reserves. The hedging curbs make it harder and costlier to bet against the rupee or buy protection against it. These are India's rules, not a signal about other central banks, and Reuters quoted one analyst saying the underlying pressures from oil prices and capital flows remain.

The measures

On October 10, 2026, the Reserve Bank of India (RBI) issued two circulars to support what it called the orderly functioning of the foreign-exchange market. Banks authorized to deal in foreign exchange may no longer let customers rebook rupee-linked currency derivatives that were cancelled after the new directions took effect, though rollovers at maturity stay allowed under existing rules. [1]

The RBI also cut, from $100 million to $5 million equivalent, the size of derivative contracts that customers can take without showing an underlying exposure. The lower limit applies to over-the-counter contracts across all banks and to exchange-traded rupee derivatives across all recognized exchanges combined. Customers hedging real exposures must give their bank a signed undertaking that the same exposure has not been hedged with another bank. [1]

For rupee derivatives with a notional value above $2 million, banks must hold a cash reserve with the RBI equal to 20% of the rupee value of each transaction. The requirement applies to current-account hedges where the customer buys foreign currency against rupees. [1]

The oil window

In a separate release the same day, the RBI said it was opening a special window to meet the "entire daily dollar requirements" of three public-sector oil marketing companies, which it named in the release. The RBI will sell the dollars through designated banks, starting Monday, October 12, until further notice. The release gives no amounts or exchange rates. [2]

Reuters explained that under such an arrangement the central bank supplies dollars directly from its foreign-exchange reserves, removing one of the largest sources of dollar demand from the open market. [3]

Why the RBI acted

Reuters reported that the rupee had fallen more than 7% in 2026, pressured by surging oil prices and global bond yields, and was near record lows. It said the measures followed more than $140 billion of capital inflows raised through one-off steps such as overseas deposit schemes and offshore borrowing by state-run firms and banks. [3]

The RBI's own statements did not name a reason beyond market discipline. Reuters quoted an unnamed person familiar with the central bank's thinking as saying it wants to moderate potentially destabilizing derivative demand and discourage circumvention through repeated rebooking. [1][3]

This follows the RBI's October 7 decision to raise its policy rate to 5.5%. [3]

Early reaction

Reuters reported the rupee strengthened about 0.6% in the non-deliverable forward market after the announcement, in thin trading. Dhiraj Nim of ANZ Bank said the oil window should reduce volatility but will show up as a drawdown of reserves, and that the steps should temper but not eliminate the pressure. Two bankers told Reuters the reserve requirement will raise the cost of buying protection against rupee weakness. [3]

What remains uncertain

The measures are the RBI's; the reasons, expected effects and cost pass-through come from Reuters' sources and analysts, not the RBI. The RBI release gives no size for the oil-company dollar sales, so the effect on reserves is unknown. Early market moves were reported in thin trading and may not last. The RBI circulars themselves (A.P. (DIR Series) Nos. 25 and 26) were read through the press release summaries, not the circular PDFs.