Annual Report

During 2025-26, the Reserve Bank continued its focus towards further strengthening of various segments of the financial markets by broadening participation, easing access and rationalising regulations in sync with evolving business practices with an aim to reduce compliance burden, improve ease of doing business and also enhance operational efficiency.

V.1 The Reserve Bank sustained its efforts to further develop and deepen financial markets by streamlining regulations and fostering innovation. The Financial Markets Regulation Department (FMRD) continued with its efforts to modernise financial market infrastructure. The Financial Markets Operations Department (FMOD) revised the liquidity management framework. The Foreign Exchange Department (FED) took several initiatives to ease compliance burden and permitted Authorised Dealer (AD) banks to lend in Indian Rupee (INR) to non-residents in select jurisdictions for cross-border trade transactions.

V.2 Against this backdrop, the rest of the chapter is structured into four sections. Development and regulation of financial markets are covered in section 2. The Reserve Bank’s market operations are discussed in section 3. In section 4, the focus is on external trade and payments, and measures relating to liberalisation and development of external financial flows. Concluding observations are provided in section 5.

2. FINANCIAL MARKETS REGULATION DEPARTMENT (FMRD)

V.3 FMRD is tasked with the responsibility of development, regulation and surveillance of money, government securities, interest rate derivatives, foreign exchange, and credit derivative markets.

Agenda for 2025-26

V.4 The Department had set out the following goals for 2025-26:

• Continuing efforts towards greater transparency in over-the-counter (OTC) derivative markets, requirements for unique transaction identifier (UTI) for OTC derivative transactions shall be implemented in India in line with global developments (Utkarsh 2.0) [Paragraph V.5]; and

• FX-Retail will be linked with Bharat Connect (earlier Bharat Bill Payment System) to expand the reach of FX-Retail platform and enhance user experience beginning with a pilot facilitating purchase of US dollar against the Rupee by individuals and sole proprietorship (Paragraph V.6).

Implementation Status

V.5 Directions mandating UTI for OTC derivative transactions were issued on February 18, 2026. Further, with a view to improve accessibility of regulatory instructions and ease of doing business, the instructions on legal entity identifier and UTI were consolidated in a single Master Direction on Unique Identifiers in Financial Markets, issued on March 27, 2026.

V.6 FX-Retail was linked with Bharat Connect on October 7, 2025. In the first phase, purchase of US dollars by individuals has been facilitated.

Major Initiatives

V.7 The extant regulatory framework for Rupee interest rate derivative (IRD) was reviewed and re-issued on December 8, 2025. This update reflects the evolving IRD market landscape, aligns with the financial system’s risk management requirements, and aims to enhance transparency in the Rupee IRD market.

V.8 To give a fillip to the market for municipal bonds, such bonds were notified as eligible collateral for repo transactions in consultation with the Government of India (GoI).

V.9 The investment regime governing investment by foreign portfolio investors (FPIs) in debt securities was recalibrated. The macro-prudential controls under the general route for FPI investments in corporate debt securities were reviewed, and the 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. Further, with a view to ensuring predictability about the availability of investment limits under the voluntary retention route (VRR) and to further enhance ease of doing business, it was decided that with effect from April 1, 2026, investments under the VRR shall be reckoned under the limit for FPI investments under the general route; and FPIs that have availed retention periods longer than the minimum retention period shall have the option of liquidating their portfolio, fully or partly, and exiting the VRR after the end of the minimum retention period.

V.10 The regulatory framework for electronic trading platforms was reviewed taking cognisance of the increased integration of onshore and offshore financial markets, technological developments and increasing product diversity. Trading and guaranteed settlement facilities were introduced for forex forward contracts of tenors up to 36 months (from 13 months). Modified Mumbai interbank forward outright rate-based swaps and foreign exchange options would enable electronification of the trading and settlement process of such instruments. With a view to electronify non-resident trades in government securities, a provision was made to connect negotiated dealing system–order matching (NDS-OM), the anonymous order matching platform for government securities, with global bond trading platforms. To leverage emerging technologies such as tokenisation and distributed ledger technology (DLT), a pilot for issuance and trading of certificates of deposit (CDs) in tokenised form using the unified markets interface platform with settlement using wholesale central bank digital currency (CBDC) has commenced.

V.11 Based on the recommendations of the Working Group for the review of trading and settlement timings in financial markets regulated by the Reserve Bank (Chair: Shri Radha Shyam Ratho, Executive Director, Reserve Bank of India), the timings of both the collateralised and uncollateralised segments of the money market were extended.

V.12 The Fixed Income Money Market and Derivatives Association of India (FIMMDA) has been granted recognition as a self-regulatory organisation (SRO) in financial markets.

V.13 Considering the evolution of the microstructure of the money market with collateralised markets becoming the dominant segment, the secured overnight Rupee rate (SORR) - a benchmark based on secured money markets [basket repo and triparty repo (TREP)] - was authorised. Financial Benchmarks of India Private Limited (FBIL) commenced the publication of the SORR benchmark with effect from July 7, 2025.

V.14 To further deepen the onshore forex market and encourage banks to quote rates directly in a larger set of currency pairs, FBIL was authorised to publish reference rates in the currencies of India’s major trading partners. FBIL commenced the publication of additional reference rates with effect from January 5, 2026.

V.15 With a view to ensure orderly market conditions and curbing excessive volatility and speculative positions, Authorised Dealers (ADs) were mandated to maintain their net open positions involving Rupee (NOP-INR) in the onshore deliverable market within US$ 100 million at the end of each business day, at the earliest but no later than April 10, 2026.

Agenda for 2026-27

V.16 For 2026-27, the Department has set the following goals:

• Ensure greater transparency in pricing for retail users by mandating disclosure of FX conversion and transaction charges for FX cash/tom/spot trades; and

• Consolidate all circulars pertaining to secondary market transactions in government securities into a single Master Direction.

3. FINANCIAL MARKETS OPERATIONS DEPARTMENT (FMOD)

V.17 FMOD is primarily responsible for the conduct of liquidity management¹ operations towards implementing the Reserve Bank’s monetary policy objectives and ensuring orderly conditions in the forex market through both onshore and offshore market operations.

Agenda for 2025-26

V.18 During the year, the Department had set out the following goals:

• Review of the liquidity management framework (Paragraph V.19);

• Undertake foreign exchange operations to curb excessive volatility in the USD/ INR exchange rate (Paragraph V.20); and

• Conduct policy-oriented research and analysis on financial markets to guide market operations strategies on an ongoing basis (Utkarsh 2.0) [Paragraph V.21].

Implementation Status

V.19 An Internal Working Group (IWG) was constituted to review the liquidity management framework which was in operation since February 2020. Based on the recommendations of the IWG and the feedback received from various stakeholders, a revised liquidity management framework was put in place with effect from September 30, 2025.

V.20 The Indian Rupee (INR) experienced bouts of volatility amidst rise in geopolitical tensions and tariff related uncertainties. The widening of merchandise trade deficit and rise in oil prices during the last quarter added to the headwinds. The Reserve Bank intervened in the forex market through operations in the onshore/ offshore OTC and exchange traded currency derivatives segments to maintain orderly market conditions and contain excessive volatility in the exchange rate.

V.21 The Department continued to conduct policy-oriented research and analysis related to financial markets during 2025-26. The studies include drivers of certificates of deposit (CDs) issuances, alternative indices for assessing fair value of INR (other than nominal effective exchange rate and real effective exchange rate), impact of inclusion of Indian government bonds in global bond indices and evolving money market dynamics and policy transmission efficiency in India.

Agenda for 2026-27

V.22 During 2026-27, the Department plans to achieve the following goals:

• Effective conduct of liquidity management operations for the purpose of monetary policy transmission;

• Undertake foreign exchange operations to curb excessive volatility in the USD/ INR exchange rate; and

• Conduct policy-oriented research and analysis on financial markets to guide market operations strategies on an ongoing basis.

4. FOREIGN EXCHANGE DEPARTMENT (FED)

V.23 In accordance with the terms of the preamble to the Foreign Exchange Management Act, 1999 (FEMA), the mandate of FED is to facilitate external trade and payments and promote the orderly development and maintenance of the foreign exchange market in India.

Agenda for 2025-26

V.24 The Department had set out the following goals for 2025-26:

• Rationalisation of Foreign Exchange Management (Guarantees) Regulations (Paragraph V.25);

• Rationalisation of the liberalised remittance scheme (LRS) [Paragraph V.26];

• Review directions on borrowing and lending transactions in INR with a view to rationalise and merge the directions into the Master Direction - External Commercial Borrowings (ECB), Trade Credit and Structured Obligations (Paragraph V.27);

• Review of the authorisation framework for authorised persons under FEMA, 1999 (Paragraph V.28);

• Rationalisation of Foreign Exchange Management (FEM) [Non-Debt Instruments] Rules, 2019 (Paragraph V.29);

• Review of Insurance Regulations, 2015 (Paragraph V.30);

• Review of Deposit Regulations, 2016 (Paragraph V.31); and

• Review of FEM [Establishment in India of a branch office (BO) or a liaison office (LO) or a project office (PO) or any other place of business] Regulations, 2016 (Paragraph V.32).

Implementation Status

V.25 FEM (Guarantees) Regulations, 2026 were notified on January 10, 2026. The universe of guarantees enabled in the reviewed framework, under automatic route, has been expanded: while the previous framework did not have any enabling provisions for guarantees issued by non-resident entities, post review, primary conditions for a guarantee transaction between a principal debtor and a surety are that the underlying transaction should not be prohibited under FEMA, 1999, and the surety and the debtor, wherever their residential statuses are different, are eligible lender and borrower under the extant borrowing/ lending framework. Further, a comprehensive reporting on a quarterly basis has been introduced for all guarantees – issued, modified and invoked.

V.26 Key areas of the LRS review include rationalisation of guidelines to reduce compliance burden for current account remittances, addressing various issues in the extant LRS covering, inter alia, the permitted purposes, payment mode/currency and declaration. The review process is currently underway.

V.27 It has been decided to consolidate directions on borrowing and lending transactions in INR into a single document: ‘Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (FEMA 3R)’, instead of ‘Master Direction – External Commercial Borrowings, Trade Credit and Structured Obligations’. Rationalised provisions for borrowing in INR by persons resident in India (PRIs) from persons resident outside India (PROIs) have been consolidated through an amendment² to FEMA 3R notified on February 16, 2026. Revised regulations covering provisions on lending in INR are currently being reviewed.

V.28 The authorisation framework is being rationalised and simplified to improve the availability of forex services and operational efficiency, while maintaining appropriate safeguards, bridging regulatory gaps and enhancing ease of doing business.³

V.29 The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 have been reviewed with a focus on making procedures more principle-based, ensuring uniform applicability across investee entities, avoiding overlap with existing domestic laws and clearly distinguishing foreign investment rules from foreign direct investment (FDI) Policy. The revised rules have been submitted to the GoI in November 2025 for consideration.

V.30 Based on the comments received from concerned stakeholders, the extant FEMA Insurance Regulations, 2015⁴ are currently under internal review.

V.31 Pursuant to an internal review of the extant deposit regulations, a simultaneous review of FEMA Regulations governing deposits⁵ and FEMA Regulations governing Foreign Currency Accounts by PRIs⁶ is being carried out. Accordingly, the revised set of regulations is being considered for approval.

V.32 The extant framework for establishing LO/BO/PO/any other place of business in India has been comprehensively reviewed. The revised regulations are principle-driven and enable delegation of more powers to AD banks and reduction of compliance burden, thereby enhancing ease of doing business. Draft of the revised regulations was published on the Reserve Bank’s website in October 2025 for soliciting public feedback. Subsequent to the receipt of feedback thereon, the revised draft regulations are awaiting concurrence of the GoI.

Major Initiatives

V.33 Over the past few years, several measures have been undertaken by the Reserve Bank to enhance the role of INR as an international currency through its increasing use for both current and select capital account transactions (Box V.1).

V.34 A comprehensive digitisation initiative has been undertaken to consolidate all pertinent foreign investment data onto the Foreign Investment Reporting and Management System (FIRMS) platform. Eventually, this would enable authorised stakeholders and AD banks to generate electronic foreign investment acknowledgements through FIRMS.

V.35 Effective April 2025, exporters have been enabled to realise and repatriate full export proceeds of goods exported to Bharat Mart (a multimodal logistics network-based marketplace in the UAE) within nine months from date of sale of goods from the warehouse. Moreover, subject to reasonableness and without pre-conditions, they may open/hire warehouses and remit funds for initial as well as recurring expenses for setting up and continuing business operations of their offices.

V.36 Instances of issuance of partly paid units (PPUs) to PROIs by investment vehicles in India prior to their enablement with effect from March 2024, were permitted to be regularised through compounding, subject to completion of requisite administrative action including reporting thereof by alternative investment funds (AIFs). Accordingly, it was clarified in May 2025 that investment vehicles may report pre-circular issuances of PPUs within 180 days from the date of said clarification. The 30-day reporting timeline, however, continues for post-circular issuances of PPUs by investment vehicles, in accordance with reporting framework regulations.

V.37 Effective June 2025, importers have been allowed to make advance remittance for import of shipping vessels, without bank guarantee, or an unconditional, irrevocable standby letter of credit, up to US$ 50 million, subject to certain conditions.

V.38 In June 2025, through an amendment to the FEM (Non-Debt Instruments) Rules, 2019, Indian companies engaged in sectors or activities where FDI is prohibited, were permitted to issue bonus shares to pre-existing shareholders classified as PROIs, subject to no change in the post-issuance shareholding pattern of the investee Indian companies. Further, any bonus shares issued to such shareholders prior to the date of enablement of this provision would be deemed to have been issued in accordance with applicable provisions under FEMA.

V.39 To encourage the opening of SRVAs through rationalisation of the process, AD banks, in August 2025, have been allowed to open SRVAs of overseas correspondent banks without referring to the Reserve Bank for approval.

V.40 Through an amendment to Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2015⁷, from October 2025, Indian exporters have been permitted to repatriate unutilised funds, after adjusting for forward commitments, from the date of receipt in the foreign currency account opened with banks outside India, within: (a) three months in case of accounts maintained with banks in an international financial services centre (IFSC); or (b) next month for all other jurisdictions.

V.41 To promote cross-border trade transactions in INR and afford INR liquidity/ resources to PROIs for undertaking such transactions, AD banks, from October 2025, have been permitted to lend in INR to persons resident in Bhutan, Nepal, or Sri Lanka, including banks in these jurisdictions. This is also expected to reduce dependency on and/or requirement of inter-central bank swap in local currencies, inter-governmental lines of credit or special permissions for lines of credit by AD banks in India.

V.42 To facilitate merchanting traders to manage their trade transactions efficiently, it was decided in October 2025 to increase the time period for outlay of foreign exchange for merchanting trade transactions from four to six months.

V.43 To facilitate timely closure of entries in EDPMS⁸ and IDPMS⁹, and to reduce compliance burden on the exporters/importers, AD banks were advised in October 2025 to reconcile and close entries (including outstanding entries) in EDPMS and IDPMS of value equivalent up to ₹10 lakh per entry/bill, based on a declaration provided by the concerned exporter that the amount has been realised or by the concerned importer that the amount has been paid, and to accept any reduction in declared value or invoice value based on declaration. AD banks were further advised to review charges levied for handling small-value export and import transactions, ensuring that the same are commensurate with services rendered, and to not levy any penal charges for delays in adherence to any regulatory guidelines.

V.44 In November 2025, the time period for realisation and repatriation of full export value of goods/software/services exported from India was extended from nine to 15 months from the date of export from India, enabling exporters to better deal with global headwinds impacting their businesses. Moreover, the time period for shipment of goods has been extended from one to three years from date of receipt of advance payment (for exports) or as per agreement, whichever is later, in alignment with some recent policy amendments by the Directorate General of Foreign Trade.

V.45 On a review of the extant export/import of currency framework towards streamlining of the two, it was decided, in December 2025, to allow a person, not being a citizen of Pakistan or Bangladesh, to: take or send out of India to Nepal or Bhutan, and bring into India from Nepal or Bhutan, currency notes of Government of India and Reserve Bank of India notes for any amount in denominations up to ₹100; take out of India to Nepal or Bhutan and bring into India from Nepal or Bhutan, notes of denominations of above ₹100 up to a total limit of ₹25,000.

V.46 Foreign Exchange Management (Export and Import of Goods and Services), Regulations, 2026 were published in January 2026 in the Official Gazette. The regulations are primarily principle-based, have governing provisions for both goods and services trade, and are intended to promote ease of doing business, especially for small exporters and importers. The regulations will come into effect from October 1, 2026.

V.47 The ECB framework has been comprehensively rationalised vide an amendment in February 2026, entailing, inter alia: (a) expansion of eligible borrower and recognised lender base to enhance opportunities of credit flow; (b) linking borrowing limit with financial strength of the borrower; (c) liberalisation of enduse restrictions and minimum average maturity period requirements; (d) enabling availing of ECB at market-determined interest rates; and (e) simplification of reporting requirements to ease compliance obligations.

Agenda for 2026-27

V.48 During 2026-27, the Department plans to achieve the following goals:

• Rationalisation of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019: A comprehensive review;

• Review of Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015;

• Review of Deposits Regulations, 2016;

• Review of Foreign Exchange Management (Insurance) Regulations, 2015;

• Rationalisation of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019;

• Review of FEM [Establishment in India of a branch office (BO) or a liaison office (LO) or a project office (PO) or any other place of business] Regulations, 2016; and

• Review of Foreign Exchange (Compounding Proceedings) Rules, 2024.

5. CONCLUSION

V.49 During 2025-26, the Reserve Bank continued to focus on further developing and deepening financial markets through several initiatives, including rationalising external sector regulations for increased ease of doing business and encouraging the adoption of INR for crossborder transactions. Going forward, the liquidity operations would continue to be in sync with the stance of monetary policy, while the foreign exchange operations would be principle-based, guided by the objective of ensuring orderly movements in the exchange rate of the INR.

¹ Details relating to liquidity management operations are covered in Chapter III of this Report.

² Foreign Exchange Management (Borrowing and Lending) [First Amendment] Regulations, 2026.

³ FEM (Authorised Persons) Regulations, 2026 have been notified on May 6, 2026 to rationalise the authorisation and renewal framework for authorised persons while maintaining appropriate checks and balances. Some of the key provisions include discontinuation of fresh authorisation for Full Fledged Money Changers (FFMCs) while retaining existing FFMCs, perpetual authorisation, minimum annual forex turnover for FFMCs and non-bank AD Cat-II, introduction of forex correspondents to act as agents of ADs, expanded scope of activities for AD Cat-II, and appeal mechanism.

⁴ Reserve Bank Notification Number FEMA 12(R)/2015-RB dated December 29, 2015.

⁵ Reserve Bank Notification Number FEMA 5(R)/2016-RB dated April 1, 2016.

⁶ Reserve Bank Notification Number FEMA 10(R)/2015-RB dated January 21, 2016.

⁷ Reserve Bank notification number FEMA 10(R)/2015-RB dated January 21, 2016.

⁸ Export data processing and monitoring system.

⁹ Import data processing and monitoring system.

Index