Banks have approached the Reserve Bank of India seeking relief from the central bank's latest rupee-defence measures, arguing that the current structure of the 20% cash deposit mandate is operationally cumbersome and may unnecessarily tie up liquidity. According to people familiar with the discussions, lenders want the deposit requirement for current-account hedging replaced with a flat charge, a move they say would make the framework simpler, more transparent and less distortionary for businesses that rely on foreign-exchange protection.
Liquidity Over Collateral
The request comes at a sensitive moment for India's currency management strategy, as the RBI continues to balance support for the rupee with the need to avoid excessive strain on market functioning. The existing rule requires a cash deposit equal to 20% of the hedge amount in certain cases, effectively locking up working capital at a time when corporates are already managing elevated financing costs and volatile global conditions. Banks argue that a fee-based model would preserve the policy intent of discouraging speculative activity while reducing the liquidity drag on genuine hedgers.
Lenders say the present arrangement can be particularly burdensome for companies using current-account hedges, where the objective is to protect routine trade and payment flows rather than to take directional positions on the currency. By substituting a flat charge for a deposit, banks believe the RBI could improve the efficiency of the hedging market without weakening oversight. The proposal also reflects a broader concern among market participants that collateral-style requirements can become a hidden cost of doing business, especially for importers, exporters and firms with frequent foreign-currency obligations.
Thresholds Under Scrutiny
Banks have also flagged uncertainty around the $2 million threshold embedded in the framework, saying it complicates hedge tracking and compliance. Market participants are seeking clearer guidance on how the threshold should be applied across transactions, counterparties and rolling exposures, particularly where companies use multiple contracts to manage recurring foreign-currency needs. Without sharper rules, lenders warn, the administrative burden could rise and the risk of inconsistent interpretation across institutions could increase.
Another area where banks want explicit clarification is the treatment of hedges linked to interest payments on foreign loans. These obligations are common among Indian borrowers with overseas funding, and the lack of clarity on whether the deposit requirement applies in the same way to such hedges has created uncertainty for treasury teams. Banks say a precise rulebook is essential because ambiguity can lead to delays in execution, higher compliance costs and uneven access to protection across borrowers.
Policy Balance For RBI
For the RBI, the issue sits at the intersection of currency defence, market discipline and credit transmission. India has relied on a mix of intervention, liquidity management and prudential measures to smooth volatility in the rupee when global risk sentiment turns adverse. But measures that are too rigid can have unintended consequences, including reduced hedging activity, higher transaction costs and pressure on corporate cash flows. That is why the banking industry's push is likely to be read not as resistance to regulation, but as a request for a more workable design.
The central bank has not publicly indicated whether it will amend the framework, and any change would need to weigh the risk of misuse against the benefits of greater flexibility. A flat charge could be easier to administer and more transparent for end users, but the RBI may still prefer a structure that preserves a meaningful deterrent against speculative demand for foreign exchange. The final shape of the policy will therefore matter not only for banks, but also for importers, exporters and borrowers with overseas liabilities.
If the RBI accepts the industry's case, the move could signal a more nuanced approach to rupee defence, one that relies less on immobilising cash and more on pricing risk clearly. For now, the banking system is pressing for clarity, and businesses exposed to currency swings are watching closely for signs that the central bank will soften the mechanics of its latest measures without diluting their intent.