CHAPTER V: FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT

RBI Annual Report 2025-26

CHAPTER V: FINANCIAL MARKETS AND FOREIGN EXCHANGE MANAGEMENT

PART 1: COMPLETE REVISION NOTE

1. Overview

During 2025-26, RBI focused on deepening financial markets by broadening participation, easing access, rationalising regulations, reducing compliance burden and improving operational efficiency. FMRD, FMOD and FED undertook measures covering financial-market infrastructure, liquidity management, OTC derivatives, foreign exchange and external transactions.

2. Financial Markets Regulation Department, FMRD

FMRD is responsible for development, regulation and surveillance of money, government securities, interest-rate derivatives, foreign exchange and credit-derivative markets.

2025-26 agenda and implementation

·        Increase transparency in OTC derivatives and implement a Unique Transaction Identifier (UTI) for OTC derivative transactions in line with global developments.

·        Link FX-Retail with Bharat Connect, formerly Bharat Bill Payment System, to expand access. The linkage became operational on October 7, 2025; the first phase facilitated purchase of US dollars by individuals.

·        Directions mandating UTI for OTC derivative transactions were issued on February 18, 2026. Instructions on legal entity identifier and UTI were consolidated in the Master Direction on Unique Identifiers in Financial Markets on March 27, 2026.

Major initiatives

·        Rupee Interest Rate Derivative framework reviewed and re-issued on December 8, 2025, reflecting the evolving IRD market and risk-management requirements.

·        Municipal bonds were notified as eligible collateral for repo transactions, in consultation with GoI.

·        FPI investment regime in debt securities was recalibrated. Macro-prudential controls under the general route were reviewed; short-term investment limit and concentration limit were withdrawn.

·        Surplus balances in special Rupee vostro accounts were permitted to be invested in central government securities, including treasury bills, non-convertible debentures/bonds and commercial papers.

·        From April 1, 2026, investments under the Voluntary Retention Route, VRR, count within the FPI investment limit. FPIs with longer retention periods may liquidate their portfolio fully or partly and exit VRR after the minimum retention period.

·        Electronic trading platforms framework reviewed. FX forward contracts may have tenors up to 36 months, up from 13 months. Modified Mumbai interbank forward outright rate-based swaps and FX options enable electronic trading and settlement.

·        For non-resident government-securities trades, NDS-OM was enabled to connect with global bond-trading platforms.

·        A pilot for issuance/trading of tokenised certificates of deposit using a unified markets interface platform with wholesale CBDC settlement commenced.

·        FIMMDA was granted recognition as a self-regulatory organisation, SRO, in financial markets.

·        Secured Overnight Rupee Rate, SORR, a benchmark based on secured money markets, was authorised. FBIL began publishing SORR from July 7, 2025.

·        FBIL was authorised to publish additional reference rates in currencies of India's major trading partners from January 5, 2026.

·        Authorised Dealers were mandated to maintain net open positions involving Rupee, NOP-INR, within US$100 million at the end of each business day, at the latest by April 10, 2026.

EXAM ALERT: SORR publication started July 7, 2025; NOP-INR ceiling = US$100 million.

FMRD agenda for 2026-27

·        Greater transparency in pricing for retail users through disclosure of FX conversion and transaction charges for FX cash/tom/spot trades.

·        Consolidate all circulars relating to secondary-market transactions in government securities into a single Master Direction.

3. Financial Markets Operations Department, FMOD

FMOD conducts liquidity-management operations to implement monetary-policy objectives and supports orderly forex-market conditions through onshore and offshore operations.

2025-26

·        An Internal Working Group reviewed the liquidity-management framework operational since February 2020.

·        Revised liquidity-management framework came into effect from September 30, 2025.

·        During bouts of INR volatility arising from geopolitical tensions, tariff uncertainty, widening merchandise trade deficit and higher oil prices, RBI intervened through onshore/offshore OTC and exchange-traded currency-derivative markets to maintain orderly conditions.

·        Policy-oriented research covered CD issuances, alternative INR fair-value indicators, impact of inclusion of Indian government bonds in global bond indices, money-market dynamics and policy-transmission efficiency.

2026-27 agenda

·        Effective liquidity-management operations for monetary-policy transmission.

·        Foreign-exchange operations to curb excessive USD/INR volatility.

·        Ongoing policy-oriented research and analysis to guide market-operation strategies.

4. Foreign Exchange Department, FED

Under FEMA, 1999, FED facilitates external trade and payments and promotes orderly development and maintenance of India's foreign-exchange market.

2025-26 agenda

·        Rationalise FEMA (Guarantees) Regulations.

·        Rationalise Liberalised Remittance Scheme, LRS.

·        Review and merge directions on borrowing/lending in INR and ECB, trade credit and structured obligations.

·        Review authorised-person framework under FEMA, 1999.

·        Rationalise FEM (Non-Debt Instruments) Rules, 2019.

·        Review Insurance Regulations, 2015; Deposit Regulations, 2016; and establishment-in-India regulations, 2016.

Implementation and major measures

·        FEM (Guarantees) Regulations, 2026 notified January 10, 2026. The reviewed framework expanded automatically enabled guarantees; a quarterly reporting system for guarantees issued, modified and invoked was introduced.

·        LRS review focused on reducing compliance burden for current-account remittances, including permitted purposes, payment mode/currency and declarations.

·        Borrowing/lending directions are being consolidated into FEMA 3R, Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. An amendment notified February 16, 2026 rationalised INR borrowing by persons resident in India from persons resident outside India.

·        Authorisation framework under FEMA is being simplified to improve forex-service availability and operational efficiency while retaining safeguards.

·        FEM (Non-Debt Instruments) Rules, 2019 were reviewed to make procedures more principle-based, uniform across investee entities, avoid overlap with existing domestic laws and distinguish foreign-investment rules from FDI Policy. Revised rules were submitted to GoI in November 2025.

·        Deposit Regulations, 2016 and FEMA regulations governing foreign-currency accounts by PRIs were under review.

·        The framework for BO/LO/PO/other place of business in India was reviewed. Revised regulations are principle-driven, delegate more powers to AD banks and reduce compliance burden; draft was published in October 2025.

EXAM ALERT: FEM (Guarantees) Regulations, 2026: notified January 10, 2026.

5. Use of INR and Local Currencies for Cross-Border Trade

RBI measures seek to increase the use of INR as an invoicing/settlement currency, reduce exchange-rate risk and reliance on convertible-currency reserves, facilitate bilateral exchange-rate markets and lower transaction costs.

·        Special Rupee Vostro Accounts, SRVAs, may be opened by correspondent banks in partner countries with AD Category-I banks in India.

·        Local Currency Arrangements, LCAs, facilitate invoicing/settlement in INR or the partner country's local currency.

·        PROIs may open and maintain INR-denominated accounts with AD banks outside India for permissible current/capital-account transactions with other PROIs and bona fide transactions.

·        Transfers of funds are permitted for bona fide transactions between repatriable Rupee accounts; permitted foreign investment into India may be paid from SRVA balances.

·        As of May 2026, LCAs had been entered into with four jurisdictions: UAE, Indonesia, Maldives and Mauritius; SRVAs had been opened by correspondent banks in 35 partner countries.

·        INR-based invoicing and settlement increased significantly. For August 2022-July 2025, CAGR of imports invoiced in INR was 20.9%, exports invoiced in INR 12.7%.

Table from page 7: INR invoicing and settlement for India's trade.

₹ crore	2023-24	2024-25	2025-26
INR-invoiced imports	1,94,162 (3.7%)	2,59,940 (4.5%)	2,84,688 (4.7%)
INR-invoiced exports	2,86,794 (5.9%)	3,07,281 (5.9%)	3,27,370 (6.2%)
INR-settled imports	99,680 (1.8%)	1,13,088 (1.9%)	1,59,691 (2.5%)
INR-settled exports	1,75,086 (3.6%)	1,67,448 (3.2%)	1,71,916 (3.0%)

 

6. Other External-Sector Measures

·        FIRMS digitisation: foreign-investment data are being consolidated on the Foreign Investment Reporting and Management System, enabling electronic acknowledgements by authorised stakeholders and AD banks.

·        From April 2025, exporters could realise and repatriate full export proceeds for goods exported to Bharat Mart in the UAE within 9 months of warehouse sale. Exporters may open/maintain warehousing offices without pre-conditions, subject to reasonableness.

·        Partly paid units issued to PROIs before enabling provisions effective March 2024 could be regularised through compounding after requisite administrative action. Investment vehicles may report pre-circular PPU issuances within 180 days from the May 2025 clarification.

·        From June 2025, importers could make advance remittance for shipping-vessel imports without bank guarantee or unconditional, irrevocable standby LC up to US$50 million, subject to conditions.

·        June 2025 amendment permitted Indian companies in sectors/activities where FDI is prohibited to issue bonus shares to pre-existing PROI shareholders, subject to no change in post-issue shareholding pattern; qualifying bonus shares issued before the enabling provision are deemed compliant.

·        From August 2025, AD banks could open SRVAs of overseas correspondent banks without prior RBI approval.

·        From October 2025, Indian exporters could repatriate unutilised funds after adjusting forward commitments from foreign-currency accounts opened with banks outside India: within 3 months for accounts with IFSC banks, and by next month for other jurisdictions.

·        From October 2025, AD banks could lend INR to persons resident in Bhutan, Nepal or Sri Lanka, including banks in these jurisdictions, for cross-border trade in INR and provide INR liquidity.

·        Merchant trade transaction realisation period was extended from 4 to 6 months in October 2025.

·        EDPMS/IDPMS entries of value up to ₹10 lakh per entry/bill could be reconciled and closed based on declarations regarding realisation/payment; banks were advised to review charges on small-value transactions and avoid penal charges for delays attributable to regulatory guidelines.

·        In November 2025, export realisation/repatriation period for full export value of goods/software/services was extended from 9 to 15 months. Shipment-of-goods time limit after advance payment was extended from 1 to 3 years, or as per agreement, whichever is later.

·        In December 2025, currency rules permitted a person, other than a citizen of Pakistan or Bangladesh, to take/send Indian currency to Nepal or Bhutan and bring currency from Nepal/Bhutan, subject to denomination/amount limits: notes up to ₹100 may be taken/sent; notes above ₹100 up to a total limit of ₹25,000 may be taken/sent.

·        FEMA (Export and Import of Goods and Services) Regulations, 2026 were published in January 2026 and come into effect from October 1, 2026. They are principle-based and cover goods and services trade.

ECB framework

The ECB framework was comprehensively rationalised through a February 2026 amendment, including expansion of eligible borrowers and recognised lenders, linking borrowing limits to borrower financial strength, liberalising end-use restrictions and minimum average maturity period requirements, permitting market-determined interest rates, and simplifying reporting requirements.

7. Agenda for 2026-27

·        Rationalise FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

·        Review Foreign Currency Accounts by a Person Resident in India Regulations, 2015.

·        Review Deposits Regulations, 2016 and FEM (Insurance) Regulations, 2015.

·        Rationalise FEM (Non-Debt Instruments) Rules, 2019.

·        Review FEM (Establishment in India of BO/LO/PO/other place of business) Regulations, 2016.

·        Review Foreign Exchange (Compounding Proceedings) Rules, 2024.

8. Conclusion

The chapter's central thrust is development and deepening of financial markets through broader participation, regulatory rationalisation, lower compliance burden, greater operational efficiency and increased use of INR for cross-border transactions. Liquidity operations remain aligned with monetary policy, while forex operations seek orderly INR exchange-rate movements.

PART 2: IMPORTANT NUMBERS

Topic	Figure	Meaning
FX forward tenor	36 months	Up from 13 months
NOP-INR	US$100 million	Net open position ceiling at business-day end
FPI VRR	Apr. 1, 2026	VRR investments reckoned within FPI limit
EDDPE not relevant	-	Not part of this chapter
LCAs	4 jurisdictions	UAE, Indonesia, Maldives, Mauritius, as of May 2026
SRVA partner countries	35	As of May 2026
INR import-invoicing CAGR	20.9%	August 2022-July 2025
INR export-invoicing CAGR	12.7%	August 2022-July 2025
Advance remittance for vessels	US$50 million	June 2025, subject to conditions
EDPMS/IDPMS closure	₹10 lakh	Per entry/bill, subject to declaration
Merchant trade period	6 months	Extended from 4 months
Export realisation period	15 months	Extended from 9 months in Nov. 2025
Shipment after advance payment	3 years	Extended from 1 year, or as per agreement, whichever later
Nepal/Bhutan currency limit	₹25,000	For notes above ₹100; notes up to ₹100 separately permitted

 

PART 3: IMPORTANT DATES

Date/Period	Event
July 7, 2025	FBIL began publishing SORR
October 7, 2025	FX-Retail linked with Bharat Connect
September 30, 2025	Revised liquidity-management framework effective
November 2025	Revised non-debt investment rules submitted to GoI
December 8, 2025	Rupee IRD framework re-issued
January 10, 2026	FEM (Guarantees) Regulations, 2026 notified
January 5, 2026	Additional FBIL currency reference rates commenced
January 2026	FEMA (Export and Import of Goods and Services) Regulations, 2026 published
February 18, 2026	UTI directions for OTC derivatives issued
February 16, 2026	Amendment to FEMA borrowing/lending regulations notified
February 2026	ECB framework rationalised
March 27, 2026	Master Direction on Unique Identifiers in Financial Markets issued
April 1, 2026	VRR investments reckoned within FPI investment limit
October 1, 2026	FEMA Export and Import of Goods and Services Regulations, 2026 come into effect

 

PART 4: IMPORTANT RBI / GOI / OTHER INITIATIVES

Initiative	Organisation	One-line purpose/key fact
UTI framework	RBI/FMRD	Unique Transaction Identifier for OTC derivatives; Master Direction Mar. 27, 2026
FX-Retail + Bharat Connect	RBI	Expand retail FX access; linkage Oct. 7, 2025
Rupee IRD review	RBI	Framework re-issued Dec. 8, 2025
FIMMDA SRO recognition	RBI	Self-regulatory organisation recognition in financial markets
SORR	RBI/FBIL	Secured overnight Rupee benchmark, published from Jul. 7, 2025
FPI debt recalibration	RBI	Short-term and concentration limits withdrawn; VRR treatment revised
Electronic trading reforms	RBI	FX forward tenor raised to 36 months; electronic trading/settlement enabled
Tokenised CD pilot	RBI	Pilot issuance/trading with wholesale CBDC settlement
FEM (Guarantees) Regulations, 2026	RBI	Expanded guarantee framework and quarterly reporting
FIRMS digitisation	RBI	Consolidate foreign-investment reporting and enable electronic acknowledgements
INR internationalisation measures	RBI	SRVAs, LCAs and PROI accounts support INR invoicing/settlement
FEMA Export/Import Regulations, 2026	RBI/GoI	Principle-based framework for goods and services trade; effective Oct. 1, 2026
ECB rationalisation	RBI/GoI	Broader eligible borrowers/lenders, liberalised end-use/tenor and simplified reporting

 

PART 5: KEY DEFINITIONS / CONCEPTS

Term	Meaning
FMRD	Financial Markets Regulation Department, responsible for development, regulation and surveillance of specified financial markets
FMOD	Financial Markets Operations Department, conducts liquidity-management operations and supports orderly forex conditions
FED	Foreign Exchange Department, mandated under FEMA, 1999 to facilitate external trade/payments and orderly forex-market development
UTI	Unique Transaction Identifier for OTC derivative transactions
SORR	Secured Overnight Rupee Rate, benchmark based on secured money markets
NOP-INR	Net open position involving the Indian Rupee
VRR	Voluntary Retention Route for FPI investment, with retention-based treatment
SRVA	Special Rupee Vostro Account used to facilitate INR-based cross-border trade/settlement
LCA	Local Currency Arrangement enabling invoicing/settlement in INR or partner local currency
PROI	Person Resident Outside India
AD	Authorised Dealer under the foreign-exchange framework
FIRMS	Foreign Investment Reporting and Management System
EDPMS	Export Data Processing and Monitoring System
IDPMS	Import Data Processing and Monitoring System
ECB	External Commercial Borrowings

 

PART 6: CONFUSION POINTS

Confusion	Correct distinction
SORR date	FBIL publication began **July 7, 2025**
FX-Retail linkage date	Bharat Connect linkage = **October 7, 2025**
UTI dates	Directions = Feb. 18, 2026; consolidated Master Direction = Mar. 27, 2026
Forward tenor 13 vs 36 months	New maximum tenor = **36 months**, up from 13 months
NOP-INR	Ceiling = **US$100 million**, not ₹100 million
VRR treatment	From **April 1, 2026**, VRR investments count within FPI investment limit
LCA vs SRVA	LCA = arrangement with partner country; SRVA = account with correspondent bank
LCAs vs SRVAs	4 LCA jurisdictions vs SRVAs in **35 partner countries** as of May 2026
Merchant trade period	4 → **6 months**
Export realisation period	9 → **15 months** in Nov. 2025
Advance-payment shipment period	1 → **3 years**, or agreement period, whichever later
US$50 million limit	Applies to advance remittance for import of shipping vessels, subject to conditions
₹10 lakh limit	EDPMS/IDPMS value-equivalent threshold for reconciliation/closure based on declaration
Currency to Nepal/Bhutan	Notes up to ₹100, and notes above ₹100 up to total ₹25,000, subject to stated rules
FEMA Export/Import Regulations	Published Jan. 2026, **effective Oct. 1, 2026**

 

PART 7: LAST-MINUTE EXAM FACTS

·        FMRD covers money, government securities, interest-rate derivatives, foreign exchange and credit-derivative markets.

·        UTI directions for OTC derivatives were issued on February 18, 2026.

·        Master Direction on Unique Identifiers in Financial Markets was issued March 27, 2026.

·        FX-Retail was linked with Bharat Connect on October 7, 2025.

·        Rupee IRD framework was re-issued December 8, 2025.

·        Municipal bonds were notified as eligible collateral for repo transactions.

·        FX forward tenor increased from 13 to 36 months.

·        FIMMDA received SRO recognition in financial markets.

·        SORR was authorised and FBIL started publishing it July 7, 2025.

·        FBIL began additional currency reference rates from January 5, 2026.

·        NOP-INR is to be maintained within US$100 million at the end of each business day.

·        Revised liquidity-management framework became effective September 30, 2025.

·        FEM (Guarantees) Regulations, 2026 were notified January 10, 2026.

·        From April 1, 2026, VRR investments are reckoned within the FPI investment limit.

·        As of May 2026, LCAs covered UAE, Indonesia, Maldives and Mauritius.

·        SRVAs had been opened by correspondent banks in 35 partner countries as of May 2026.

·        INR invoicing CAGR during August 2022-July 2025: imports 20.9%, exports 12.7%.

·        Advance remittance for shipping-vessel imports permitted up to US$50 million, subject to conditions.

·        AD banks could open SRVAs of overseas correspondent banks without prior RBI approval from August 2025.

·        Merchant trade transaction period increased from 4 to 6 months in October 2025.

·        EDPMS/IDPMS entries up to ₹10 lakh per entry/bill could be reconciled/closed subject to declaration.

·        Export realisation/repatriation period increased from 9 to 15 months in November 2025.

·        Shipment period after advance payment increased from 1 to 3 years, or agreement period, whichever later.

·        FEMA Export and Import of Goods and Services Regulations, 2026 were published in January 2026 and take effect October 1, 2026.

·        February 2026 ECB amendment expanded eligible borrowers/lenders and liberalised several ECB conditions while simplifying reporting.