RBI tightens INR derivative rules for Authorised Dealers in related party situations

The Reserve Bank of India has introduced a sharper compliance framework for Authorised Dealers (ADs) engaged in foreign exchange derivative contracts involving INR, specifically where related parties are concerned. By issuing A.P. (DIR Series) Circular No. 07 dated April 20, 2026, the RBI has not only withdrawn a recent set of instructions but also prohibited most INR-linked derivative dealings between ADs and their related parties, subject to very limited carve-outs.

This development has significant implications for banks and financial entities acting as ADs under the Foreign Exchange Management Act, 1999 (FEMA, 1999), especially for group treasury structures, intra-group risk management strategies, and structured derivative arrangements with affiliates.

Regulatory backdrop and evolution

Key earlier circulars and directions

The new circular must be read in the context of the following prior RBI communications:

  • A.P. (DIR Series) Circular No. 24 dated March 27, 2026
  • A.P. (DIR Series) Circular No. 03 dated April 01, 2026
  • Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016, as amended periodically

The RBI has now reviewed this framework and decided to recalibrate the risk controls surrounding derivative contracts involving INR, particularly where group or related party relationships may heighten concerns of conflict of interest, mispricing, or circumvention of regulatory intent.

Withdrawal of earlier April 01, 2026 instructions

The circular makes it explicit that the instructions issued under A.P. (DIR Series) Circular No. 03 dated April 01, 2026 stand withdrawn. In effect, any guidance or relief that ADs might have been relying upon under that specific circular regarding INR-linked derivatives can no longer be used from the date of the new circular.

Authorised Dealers must ensure that all policies, product notes, and internal approvals referencing A.P. (DIR Series) Circular No. 03 dated April 01, 2026 are immediately revisited and updated to reflect its withdrawal.

The central prohibition

The pivotal change introduced by A.P. (DIR Series) Circular No. 07 is the following RBI directive:

Authorised Dealers shall not undertake any foreign exchange derivative contract involving INR with their related parties.

This is a blanket bar that covers all foreign exchange derivative contracts where:

  1. The contract involves INR, and
  2. The counterparty is a related party of the AD, as defined under applicable accounting standards.

This will directly impact:

  • Intra-group derivative trades between an AD branch and its group entities
  • Risk hedging structures across related companies routed through ADs
  • Internal treasury structures relying on ADs within a conglomerate

The restriction is broad and does not hinge on the purpose of the derivative, the nature of the underlying exposure, or the risk profile of the transaction. It is framed as a general prohibition, subject only to two narrow exceptions discussed below.

Limited exceptions permitted by RBI

RBI has carved out two specific scenarios in which ADs may still deal in INR-linked foreign exchange derivatives with related parties. These are strictly limited and must be interpreted conservatively to avoid compliance breaches.

1. Cancellation and rollover of existing contracts

ADs are allowed to:

  • Cancel existing foreign exchange derivative contracts involving INR that were previously entered into with related parties; and
  • Rollover such existing contracts in accordance with applicable RBI regulations.

In practice, this means:

  • If an AD already has outstanding INR derivative contracts with a related party, it is not required to abruptly terminate those contracts in a disorderly manner.
  • Instead, it may:
    • Close out (cancel) the contracts, or
    • Extend them (rollover), subject to compliance with all existing risk management rules and RBI directions.

This carve-out enables an orderly transition towards full alignment with the revised regime, while preventing fresh structuring or expansion of related party derivative positions under the guise of “existing arrangements”.