RBI tightens forex rules; banks to hold additional 20% reserve requirement

The Reserve Bank of India has issued fresh guidelines requiring banks to park additional forex risk reserves as part of their Cash Reserve Ratio obligations, effective immediately. Under the new rules, lenders must maintain a 20 percent forex risk reserve in their CRR accounts over and above the mandatory balances they are already required to hold.

The directive marks a significant tightening of forex regulations and is aimed at strengthening the banking sector's resilience against currency volatility. By requiring banks to set aside additional reserves specifically for forex risks, the RBI seeks to ensure adequate buffers against potential market disruptions.

Market participants have flagged concerns that the new requirement will raise hedging costs for banks operating in the foreign exchange space. The increased reserve requirement is also expected to push up forward premiums, making it more expensive for importers and exporters to hedge their currency exposures.

The move comes as the RBI continues to fine-tune its regulatory framework to maintain financial stability while managing cross-border flows. Banks have been directed to comply with the new norms in their next reporting cycle, with the central bank emphasizing the importance of maintaining adequate capital buffers in an uncertain global environment.