What Is Currency Hedging?

When you invoice in dollars or euros, the rupee value of that invoice changes every day until the money arrives. If the rupee strengthens before payment, you receive fewer rupees. Hedging is a way to fix or limit that outcome in advance. The most common tool for small exporters is a forward contract, which RBI describes as an exchange of two currencies on a future date at a rate agreed on the contract date. Hedging does not earn extra income. It trades the chance of a better rate for a known one. RBI does not make hedging compulsory, so each exporter decides whether it suits the size and timing of their receipts.

For example, a Pune developer invoices USD 5,000 payable in 60 days. The rate today is Rs 83 per dollar, so the invoice is worth about Rs 4,15,000. The developer books a forward contract at an assumed Rs 83.50 with the AD bank. If the spot rate falls to Rs 82 on the due date, the contract still converts at Rs 83.50. These rates are hypothetical.

• Income tax: Gains or losses on a hedge can affect taxable income. Ask a chartered accountant how your forward contract result is treated for your own tax year and filing.
• GST: Hedging itself does not change the GST position of the export invoice. Zero-rated treatment depends on the conditions in IGST Act section 16, covered in what is zero-rated supply.
• Bank compliance: The Master Direction lets exporters hedge both contracted and anticipated exposures through Authorised Dealers. Realisation of export proceeds still follows the time limit in Regulation 5 of the 2026 export regulations, so a hedge date should fit inside it.
• Pricing: A hedge fixes the rupee value only if the payment arrives on time and in the amount booked. See forward contract for exporters for the mechanics.

A typical hedge for an exporter starts with a foreign currency invoice and ends with the bank converting the receipt at the agreed forward rate. The AD bank quotes the rate based on the market and its own margin.

1. The exporter raises an invoice in foreign currency and estimates the receipt date.
2. The exporter asks the AD bank for a forward quote for that date and amount.
3. The exporter and bank agree the rate, amount and delivery date in a contract.
4. The foreign client pays and the money reaches the bank account.
5. The bank converts the amount at the contract rate on the agreed date, and the exporter reconciles it with the invoice.

Compare the rupee amount you would receive at the forward rate with the amount at the spot rate you expect, then weigh the gap against your tolerance for a lower rupee receipt. All figures here are hypothetical.

1. Take the invoice amount, for example USD 10,000.
2. Note today's spot rate, for example Rs 83.00, giving Rs 8,30,000.
3. Ask the AD bank for the forward rate for your payment date, for example Rs 83.60, giving Rs 8,36,000.
4. Test a worse case, for example a spot rate of Rs 81.50 on the due date, giving Rs 8,15,000.
5. Subtract: the hedge protects Rs 21,000 in that case, and gives up gains if the rate rises to Rs 85.
6. Check the bank's charges, margins and cancellation terms in writing before you sign.

Hedging offsets an existing or expected foreign currency exposure, while speculation takes a position with no underlying business exposure. RBI's Master Direction ties permitted hedging to a contracted or anticipated exposure. Check the limits with your AD bank.

• Compulsory: RBI's Master Direction permits hedging through Authorised Dealers and does not require exporters to hedge.
• Guarantees profit: A hedge fixes a rate for the amount booked. If the rate moves in your favour, you do not gain from that movement on the hedged amount.
• Only large firms: Eligibility, minimum amounts and documents are set through the AD bank and the Master Direction, so a smaller exporter should ask the bank what it requires before assuming it cannot hedge.
• Free to use: A forward rate quoted by a bank may include its own margin or fees. Ask for the full quote, including any cancellation charge.
• Covers late payment: If the client pays after the contract date, the booking may need extension or cancellation with the bank. Confirm the terms in your contract.

• Forward contract: An agreement to exchange two currencies on a future date at a rate fixed today.
• Mid-market rate: The midpoint between buy and sell prices in the interbank market, used as a benchmark.
• FX markup: The margin added over the benchmark rate when currency is converted.
• AD bank: An Authorised Dealer bank permitted by RBI to deal in foreign exchange.
• TT buying rate: The rate at which a bank buys foreign currency from a customer by telegraphic transfer.

Every rule and definition on this page is linked to its official source, checked on the dates below.

1. RBI Master Direction - Risk Management and Inter-Bank Dealings, Paragraphs 1(i), 2.4(ii); Annex XXII(f) (checked 9 Oct 2026)
2. Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026, Regulation 5 (checked 9 Oct 2026)
3. CBIC GST Acts, IGST Act (checked 9 Oct 2026)