India

When you enter into an FX forward or an interest rate swap involving the rupee with a customer in India or an overseas investor, you need to check whether the counterparty is a resident or a non-resident and whether the trade is for hedging. India's rules also apply when you arrange trade reporting and clearing.

How Indian derivatives regulation is organized

India's derivatives regulation is set out in separate documents for each product. FX derivatives are covered by the Master Direction "Risk Management and Inter-Bank Dealings" (the FX Master Direction on this page), and interest rate derivatives and credit derivatives each have their own master direction. A master direction is a document in which the Reserve Bank of India (RBI) compiles its instructions on one field. The RBI amends it by circular¹.

The documents set out who may offer products, which products and purposes are allowed for each class of user, the requirements for hedging, and reporting. For FX derivatives, the circulars of October 2026 added a ban on rebooking, a reserve requirement, and a hedging-only purpose rule for non-residents.

Legal basis and supervisors

The legal basis has three layers: statutes, rules made under them, and RBI directions. The FX derivatives rules are RBI rules and directions under the Foreign Exchange Management Act (FEMA). The interest rate and credit derivatives rules are RBI directions under the Reserve Bank of India Act².

Supervision is divided by the place and type of the transaction. In the table below, CCIL is the body that operates clearing and trade repository services for OTC derivatives⁴.

The RBI's directions leave four matters to SEBI: approving how settlement prices are set for exchange-traded currency derivatives, the rules for members, trading hours for interest rate derivatives, and the detailed trading procedures for credit derivatives⁵.

Exchange-traded FX derivatives are handled by stock exchanges and clearing houses authorized by the RBI. The products are currency futures and European-style currency options. The currency pairs are USD-INR, EUR-INR, GBP-INR, JPY-INR, EUR-USD, GBP-USD, and USD-JPY, and the tenor is up to 12 months. Contracts involving the rupee can hedge a contracted exposure and are cash-settled in rupees. The final settlement price is the reference rate of Financial Benchmarks India Pvt. Ltd. (FBIL)⁶.

The text of the FX Master Direction does not reflect Circulars 25 to 27⁷.

The directions and circulars were checked in the versions published as of October 23, 2026 (the foreign exchange Master Direction as updated on October 1, 2026, and Circulars 25 to 27 as issued on October 10 and 12).

Rules for FX derivatives

Users and products

An authorised dealer (AD) that offers FX derivatives sorts its users into retail and non-retail. A user is any person other than an authorised dealer, resident or non-resident⁸. The following can be classified as non-retail⁹:

• All India Financial Institutions, and non-banking financial companies (including standalone primary dealers and housing finance companies)
• Insurance companies, pension funds, mutual funds, and alternative investment funds
• Residents with a net worth of at least INR 500 crore or turnover of at least INR 1,000 crore (1 crore = 10 million)
• Non-residents other than individuals

All other users are retail. A user who qualifies as non-retail may choose to be retail. A retail user can become non-retail if it asks and the AD is satisfied with its risk management capability. Residency follows the definitions in FEMA¹⁰.

The products that can be offered depend on the user's class¹¹.

Restrictions on purpose depend on the product and the currencies involved¹².

Hedging requirements and reserve

Hedging means entering into an FX derivative to offset the effect of a foreign currency risk that is expected in the future or has already been contracted¹³. For FX derivatives involving the rupee (except NDDCs for non-residents), the AD checks the following throughout the life of the contract¹⁴:

• Whether the same risk is already hedged with another derivative
• Whether the notional amount and tenor stay within the amount and tenor of the hedged exposure
• Whether the user has adjusted the contract to match when the exposure shrinks or ceases
• Whether the contract rests on a reasonable estimate, reviewed regularly, when the exposure amount is not fixed

Net gains from hedging an anticipated risk are passed to the user only when the cash flow of the anticipated transaction arises¹⁵.

Circular 25 of October 10, 2026 added three rules to these checks. It took effect on issue and applies to FX derivatives involving the rupee¹⁶.

• A contract cancelled with any AD cannot be rebooked by the user. Rollover at maturity is still permitted.
• A user can hold at most USD 5 million equivalent in notional amount without showing an underlying exposure (when hedging a contracted exposure; counted as the total outstanding across all ADs). The text of the FX Master Direction still shows the pre-circular figure of USD 100 million equivalent.
• When entering into a contract, the AD obtains from the user, and keeps, an undertaking that the same exposure has not been hedged with another AD.

Circular 26 (October 10) and Circular 27 (October 12) require ADs to maintain a Foreign Exchange Risk Reserve (FERR). The reserve is 20% of the rupee equivalent of the notional amount, deposited in cash in India with the RBI and maintained daily until the contract ends. Which contracts are covered depends on the counterparty¹⁷.

Circular 26 treats a user's attempt to avoid the USD 2 million threshold by splitting a trade into several transactions as a violation. The AD reports the reserve every day through the RBI's system (CIMS). Both circulars apply to contracts entered into after they were issued.

Figure description

The figure applies the Circular 26 test for contracts with users through four questions in order: whether the rupee is involved, whether the contract hedges current account transactions, whether the user buys foreign currency, and whether the notional amount exceeds the threshold. A "no" at any step leads to the box on the right, "not covered". Only four "yes" answers make the contract subject to the reserve.

Non-deliverable rupee contracts (NDDCs)

The FX Master Direction and Circulars 25 to 27 do not use the term NDF. They call an OTC FX derivative contract that is cash-settled without delivery of principal a non-deliverable foreign exchange derivative contract (NDDC). The Master Direction does not state how NDDCs relate to NDFs¹⁹. How an NDF works as a product is covered on the Non-Deliverable Forwards (NDF) page.

NDDCs involving the rupee can be offered by AD Category-I banks that operate an IFSC Banking Unit (IBU) in an IFSC, and by standalone primary dealers authorised as AD Category-III. A bank may instead rely on a non-resident parent bank that operates an IBU. NDDCs can be offered to both residents and non-residents²⁰. NDS and NDO as products are covered on the Non-Deliverable Swaps and Options (NDS, NDO) page.

Before the circular of October 12, 2026, there was no restriction on purpose for non-residents²¹.

Onshore and offshore

The directions distinguish where a transaction is offered: by an AD in India, or by the AD's overseas entities (overseas branches, IBUs, wholly owned subsidiaries, and joint ventures). To offer an FX derivative involving the rupee to a non-resident, an AD deals directly or on a back-to-back basis with an overseas entity. The overseas entity must be allowed to deal as a dealer or market maker under the laws of its location. A subsidiary or joint venture incorporated in India must be a banking entity²².

In the inter-bank market, AD Category-I banks with an IBU and standalone primary dealers can trade NDDCs with ADs of the same type and with banks overseas. They can trade through an IBU, a branch in India, or a foreign branch, and settle in rupees or a foreign currency²³. An AD can deal with customers and in the inter-bank market outside onshore market hours²⁴.

Interest rate derivatives and credit derivatives

Rupee interest rate derivatives

The Master Direction on Rupee Interest Rate Derivatives applies to OTC and exchange-traded transactions. In the OTC market, at least one party to a transaction must be a market maker (such as a scheduled bank, a standalone primary dealer, or an upper-layer non-banking financial company) or a clearing house authorized by the RBI²⁵.

Users are split into retail and non-retail in the same way as for FX. Retail users can be offered forward rate agreements, interest rate swaps, options, caps, and floors that the user buys, and collars only in a form where the retail user is not a net receiver of premium. Non-retail users can also be offered swaptions and other products²⁶. Restrictions on purpose depend on the user's class²⁷.

Non-hedging transactions of non-residents are subject to a cap. The PVBP (Price Value of a Basis Point) of outstanding positions, added across non-residents without regard to sign, must not exceed INR 1,000 crore. Once the cap is reached, non-hedging transactions cannot be offered. CCIL publishes the use of the cap every day. For non-residents, interest rate derivatives on government securities are limited to hedging. Contracts based on the Modified Mumbai Interbank Forward Outright Rate (MMIFOR) are limited to hedging for users²⁸.

AD Category-I banks and standalone primary dealers can offer foreign-currency-settled rupee interest rate derivatives (FCS-IRD) to non-residents. The floating rates and other benchmarks used in OTC interest rate derivatives are those calculated by an administrator authorized by the RBI²⁹.

Credit derivatives

The Master Direction on Credit Derivatives was issued on June 25, 2026 and replaced the 2022 directions. It applies to OTC and exchange-traded transactions and permits credit default swaps (CDS) and total return swaps (TRS). The direction originated in the statement on monetary policy of February 6, 2026, which listed the introduction of credit index derivatives and TRS on corporate bonds³⁰.

Eligible market makers are scheduled commercial banks (except small finance banks and payments banks, among others), standalone primary dealers, upper-layer and middle-layer non-banking financial companies, and development finance institutions such as the Export-Import Bank of India. At least one party must be a market maker or a clearing house authorized by the RBI³¹.

CDS protection buyers and sellers face the following limits³²:

• Among buyers, a resident retail user other than an individual can buy protection only for hedging. Non-retail buyers face no restriction on purpose.
• The non-retail users that can sell protection are insurance companies, pension funds, mutual funds, alternative investment funds, and foreign portfolio investors (FPIs). Insurance companies, pension funds, mutual funds, and alternative investment funds sell with the approval of their own regulators.
• The total notional amount of protection sold by all FPIs together is capped at 5% of the outstanding stock of corporate bonds. CCIL publishes the use of the cap, and once it is reached, FPIs cannot sell more.
• Neither CDS nor TRS can be offered to individuals.

The reference entity must be a resident. Reference obligations can be money market debt instruments, rated rupee corporate bonds, and unrated rupee bonds issued by special purpose vehicles set up by infrastructure companies. Asset-backed securities, mortgage-backed securities, and bonds with credit enhancement, guarantees, or convertible features cannot be used. A transaction cannot be entered into if the reference entity is a related party of either counterparty. Government-related entities, however, are not treated as related parties of one another³³.

A TRS can be offered to a non-resident in two cases: for hedging, or in a fully funded form. In the fully funded form, the non-resident is the total return receiver and pays the full notional amount of the reference asset to the market maker. The latter notional amount counts against the limits on foreign investment in corporate bonds³⁴. A user buying for hedging cannot buy a contract above the face value of the reference obligation held. The contract's tenor can run to the maturity of the reference obligation, or to the standard CDS or TRS maturity date immediately after it. If the user no longer holds the reference obligation, it must exit the contract within one month³⁵.

Settlement is by cash or physical delivery, and a CDS can also be settled by auction. A TRS of a non-resident that is not an FPI is cash-settled only. Decisions of the Credit Derivatives Determinations Committee, set up by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), bind market participants. Exchange-traded CDS and credit index futures are limited to products approved in advance by the RBI, and SEBI sets the trading procedures³⁶.

Reporting, clearing, and margin

Reporting to the trade repository

ADs and market makers report OTC derivatives to CCIL's trade repository (TR). According to a CCIL page (undated; viewed on October 23, 2026), CCIL's TR began collecting data on rupee interest rate swaps in August 2007. It widened FX derivative reporting in four phases from July 2012 to December 2013³⁷. The reporting deadline depends on the type of transaction³⁸.

For inter-bank FX deals involving the rupee, deals made in the last 30 minutes before the reporting platform closes, or after it closes, are reported by 10 a.m. on the next business day. For contracts not involving the rupee, currency swaps, structured transactions, and foreign currency interest rate derivatives, deals made after 5 p.m. are likewise reported by 10 a.m. on the next business day. For rupee interest rate derivatives, foreign-currency-settled transactions with non-residents are reported before noon on the next business day, and structured transactions before the TR closes the same day.

Back-to-back transactions are reported with the details of the non-resident customer. Overseas counterparties and customers have no duty to report or confirm, and the AD or market maker is responsible for the accuracy of what is reported. Balances in the books and the TR are reconciled on an ongoing basis. CCIL sets the reporting formats with the RBI's approval³⁹.

Market makers in rupee interest rate derivatives also report transactions that their overseas related parties enter into worldwide. The share to be reported is at least 80% of the total notional amount from January 1, 2027, and at least 90% from January 1, 2028⁴⁰. Operators of electronic trading platforms are authorized by the RBI and report trade information to the TR or reporting platform that the RBI specifies⁴¹.

Clearing

According to the CCIL pages (undated; viewed on October 23, 2026), the scope of clearing is as follows.

CCIL began clearing FX forwards on December 1, 2009. Inter-bank trades with a residual maturity of up to 36 months are eligible for guaranteed settlement, and since February 2021, customers such as corporates and FPIs can also clear USD-INR trades through a clearing member⁴².

For rupee interest rate swaps and forward rate agreements, CCIL clears contracts based on the MIBOR and MIOIS benchmarks up to a residual maturity of 10 years. Contracts based on MMIFOR are open to bank ADs. Since November 2008, CCIL has also offered multilateral net settlement without a guarantee. CCIL describes itself as having been accorded the status of a qualifying central counterparty (QCCP)⁴³.

The RBI's directions provide that interest rate derivatives and credit derivatives are settled bilaterally or through a clearing arrangement that the RBI has approved⁴⁴.

Margin for non-centrally cleared OTC derivatives

The directions on margin for non-centrally cleared OTC derivatives apply to non-cleared FX, interest rate, and credit derivatives entered into on or after November 8, 2024. A covered entity is determined by the average of outstanding notional amounts. The average is the simple average of the total outstanding notional amounts at the end of March, April, and May, and applies from September 1 of that year to August 31 of the next⁴⁵.

Margin is exchanged as follows⁴⁶:

• A domestic covered entity exchanges margin in trades with domestic or foreign covered entities.
• Variation margin is calculated daily, and both variation margin and initial margin are exchanged within three business days (T+3) of the trade or recalculation date.
• The threshold for initial margin is up to INR 450 crore, and the minimum transfer amount is up to INR 4.5 crore for variation margin and initial margin combined.
• Trades with governments, foreign sovereigns, central banks, the Bank for International Settlements, and multilateral development banks, and trades within the same consolidated group, are outside the directions.
• Entities may choose not to exchange margin on physically settled FX forwards and FX swaps.

Role of GIFT City (IFSC)

The IFSC at GIFT City is the first IFSC in India. The IFSCA develops and regulates financial products, financial services, and financial institutions in the IFSC. It was established on April 27, 2020. Before that, the RBI, SEBI, the pension fund regulator, and the insurance regulator regulated business in the IFSC⁴⁷.

Under the definition in the original 2019 Gazette text, "financial product" in the IFSCA Act includes securities, deposits, credit arrangements, and foreign currency contracts, other than currency exchanges that are settled immediately⁴⁸. The RBI's powers under FEMA and SEBI's powers under the Securities Contracts (Regulation) Act do not extend to the IFSC for the financial products, services, and institutions regulated there, and the IFSCA exercises them instead⁴⁹.

In the derivatives rules, the IBU is a requirement for banks that offer rupee NDDCs, and, as one of an AD's overseas entities, a route for transactions with non-residents. As the rules for IBUs, the IFSCA publishes the "IFSCA (Banking) Regulations, 2019"⁵⁰.

Worked examples

Actual outcomes depend on the terms of the transaction and on how the authorities apply the rules.

Consider a hypothetical example in which Company U, an importer in India, enters into an FX forward with Bank Z (an AD Category-I bank) to buy USD 3 million in six months. The trade hedges the payment of a contracted import invoice at INR 90 per US dollar, and Company U has not hedged the same payment with another AD.

The contract involves the rupee, hedges a current account transaction, has Company U buying foreign currency, and has a notional amount above USD 2 million, so all four questions in the figure are answered "Yes" and the contract is subject to the reserve in Circular 26. Taking the rupee equivalent at the trade rate of INR 90 per US dollar, the notional amount is INR 270 million. Bank Z deposits 20% of that amount, INR 54 million, in cash with the RBI until the contract ends, and reports it daily.

USD 3 million is within USD 5 million, and Company U has no positions with other ADs, so Company U does not need to show an underlying exposure when it enters into the trade. It does need a contracted invoice that it can show if asked, and it gives Bank Z an undertaking that it has not hedged with another AD.

If Company U instead enters into an FX forward to sell USD 3 million of export proceeds, Company U is the seller of foreign currency, and the reserve does not apply. The hedging requirements, such as that the notional amount and tenor not exceed the amount and tenor of the export proceeds, are unchanged.

Consider a hypothetical example in which an asset manager outside India (a non-resident) tries to enter into a rupee NDDC with Bank Z to profit from rupee moves, not to hedge. Bank Z operates an IBU, but from October 12, 2026, NDDCs for non-residents are limited to hedging, so Bank Z cannot offer this trade. Before the circular, purpose was not restricted.

Points to check in practice

An AD keeps the undertakings and other documents it receives for hedging trades for at least two years⁵¹. Market makers introduce a new product only after sign-off by the chief compliance and risk officers and approval by the board, and they do not deal in products they cannot price independently, directly or back-to-back⁵². For rupee interest rate derivatives, the reconciliation of balances in the books and the TR is subject to concurrent audit⁵³.

What this page does not cover

The text of FEMA and the FEMA 25 rules, the details of how residence is determined, penalties, and the handling of violations are not covered on this page.

Whether Indian rules reach rupee NDFs that non-residents trade with each other outside India, the clearing of NDFs, and the calculation of the FBIL fixing are not covered on this page.

Rules on bond investment by foreign portfolio investors, the directions on forward contracts in government securities, commodity derivatives, tax, rules that require clearing, individual rules of SEBI and the IFSCA, and the products of exchanges in the IFSC are not covered on this page.

Notes

1. RBI, "Master Direction - Risk Management and Inter-Bank Dealings" (external site), opening paragraphs 2 to 4 (issued July 5, 2016). ↩

2. FX Master Direction (external site), opening (FEMA section 47(2)(h), section 11, and Reserve Bank of India Act section 45W). Interest rate derivatives (external site) and credit derivatives (external site) are issued under sections 45W and 45U of the Act. ↩

3. FX Master Direction (external site), opening and Appendix I; the dates of Circulars 25 (external site), 26 (external site), and 27 (external site). Interest rate (external site): covering letter and paragraph 1.3. Credit (external site): covering letter and paragraph 1(iii). Market-makers (external site): covering letter and paragraph 1.2. Margin (external site): covering letter and paragraph 1(2). Electronic trading (external site): covering letter. IFSCA Act (external site): the date of assent at the start of the Gazette. ↩

4. CCIL, "Derivatives (Trade Repository)" (external site), "Forex Forward" (external site), and "Interest Rate Derivatives" (external site), Introduction. ↩

5. FX Master Direction (external site), paragraph 3.4(iii) and (v). Interest rate derivatives (external site), paragraph 4.6. Credit derivatives (external site), paragraph 6.1(ii). ↩

6. FX Master Direction (external site), paragraphs 3.1 to 3.4. Settlement price: paragraph 3.4(iii). ↩

7. FX Master Direction (external site), opening paragraph 4, and the text of paragraphs 2.4(i) and 3.4(i) (still showing USD 100 million). ↩

8. FX Master Direction (external site), paragraph 1(i)(r) (a user is a person under FEMA section 2(u) other than an AD). ↩

9. FX Master Direction (external site), paragraph 2.1(i) to (v). ↩

10. Interest rate derivatives (external site), paragraph 2.1(xxiv) and (xxviii) (FEMA section 2(w) and (v)). The FX Master Direction uses the same statutory definitions. ↩

11. FX Master Direction (external site), paragraph 2.2(ii) and (iii). Bought spreads are call spreads and put spreads. ↩

12. FX Master Direction (external site), paragraph 2.3(i), (ii), (iv), (v), and (vi). ↩

13. FX Master Direction (external site), paragraph 1(i)(a), (b), and (i) (anticipated and contracted risk, and the definition of hedging). ↩

14. FX Master Direction (external site), paragraph 2.4(i)(a) to (e). Differences caused by changes in the market value of the exposure, and changes the AD considers not material, need no adjustment. ↩

15. FX Master Direction (external site), paragraph 2.4(ii) and (iii) (cancellation and rebooking, and net gains on hedges of anticipated risk). Circular 25 changed rebooking. ↩

16. RBI Circular 25 (external site), paragraph 2(a) to (d) (effective on issue). ↩

17. RBI Circular 26 (external site), paragraphs 2 to 5. ↩

18. RBI Circular 27 (external site), paragraphs 2, 3, and 4. ↩

19. FX Master Direction (external site), paragraph 1(i)(m). The term NDF does not appear in the text of this Master Direction or Circulars 25 to 27. ↩

20. FX Master Direction (external site), paragraph 2.2(vi). ↩

21. FX Master Direction (external site), paragraphs 2.2(vii), 2.3(iii), and the opening of 2.4(i). The purpose rule for non-residents is in RBI Circular 27 (external site), paragraph 2. ↩

22. FX Master Direction (external site), paragraph 2.4(vi) and (vii) (payments are met from repatriable funds or inward remittance through normal banking channels). ↩

23. FX Master Direction (external site), Part C, paragraph 3A. ↩

24. FX Master Direction (external site), Part C, paragraph 6. Market hours for interest rate derivatives: interest rate derivatives (external site), paragraph 5.6(vi). ↩

25. Interest rate derivatives (external site), paragraphs 1.2 and 5.1. ↩

26. Interest rate derivatives (external site), paragraphs 5.2 and 5.3(i) and (ii). ↩

27. Interest rate derivatives (external site), paragraph 5.4(i) to (iii). ↩

28. Interest rate derivatives (external site), paragraph 5.5(b), and the proviso to 5.4(iii) and 5.4(iv). ↩

29. Interest rate derivatives (external site), paragraphs 5.3(iii) and 5.6(i). ↩

30. Credit derivatives (external site), covering letter paragraph 1, paragraph 1(ii) and (iii), and paragraph 4.1. ↩

31. Credit derivatives (external site), paragraph 4.2.1. ↩

32. Credit derivatives (external site), paragraph 4.3.1(i) to (vi). The rule that a TRS cannot be offered to an individual is in paragraph 4.3.2(iv). ↩

33. Credit derivatives (external site), paragraph 4.4(i) to (v), and paragraph 4.5.1(i). ↩

34. Credit derivatives (external site), paragraph 4.3.2(iii)(a) to (f). ↩

35. Credit derivatives (external site), paragraph 4.5.2(i) and (iii). ↩

36. Credit derivatives (external site), paragraphs 4.5.1(v), 5, 6.1(i) and (ii), and 6.2. ↩

37. CCIL, "Derivatives" (external site), Introduction, Rate Derivatives and Forex Derivatives. ↩

38. FX Master Direction (external site), Part E, B(i)(a) to (d). Interest rate derivatives (external site), paragraph 5.7(a)(i). Credit derivatives (external site), paragraph 4.5.5(i). ↩

39. FX Master Direction (external site), Part E, B(ii) to (vi). ↩

40. Interest rate derivatives (external site), paragraph 5.5(a) and Annex-II, paragraph 3. Contracts with a gross notional amount of USD 1 million or less may be left unreported. ↩

41. Electronic Trading Platforms directions (external site), paragraph 3 (prior RBI authorization) and the third item of paragraph 7 (reporting of trade information). ↩

42. CCIL, "Forex Forward" (external site), Introduction. ↩

43. CCIL, "Interest Rate Derivatives" (external site), Introduction and Benefits. ↩

44. Interest rate derivatives (external site), paragraph 5.6(iii). Credit derivatives (external site), paragraph 4.5.1(iv). ↩

45. Margin directions (external site), paragraphs 1 and 2(1) and 4.3. ↩

46. Margin directions (external site), paragraphs 4.1, 4.2, 4.4(1) to (6), 5.1(2), and 6(3) to (5). ↩

47. IFSCA home page (external site), "About the IFSCA". ↩

48. International Financial Services Centres Authority Act (external site), section 3(1)(d) (financial product) and section 12(1) (duty to develop and regulate). Based on the original 2019 Gazette text. ↩

49. International Financial Services Centres Authority Act (external site), section 13(1), and the insertion of FEMA section 44A, Securities Contracts (Regulation) Act section 29B, and Reserve Bank of India Act section 57A by the Second Schedule. ↩

50. FX Master Direction (external site), paragraphs 2.2(vi) and 2.4(vi). The IFSCA's "IFSC Banking Units" (external site) page. ↩

51. RBI Circular 25 (external site), paragraph 3 (the AD is responsible for compliance, including the existence of the underlying exposure, and keeps documents for at least two years). ↩

52. Market-makers directions (external site), paragraphs 4.2.1, 4.2.4, 4.3.2, and 4.3.3. ↩

53. FX Master Direction (external site), Part E, B(iv). Interest rate derivatives (external site), paragraph 5.7(a)(vii). ↩