What Is Forward Contract?

An exchange rate can move between the day you invoice and the day you are paid. A forward contract removes that uncertainty for the amount you cover. You agree with your bank to sell a set amount of foreign currency on a set date at a rate fixed today. When the payment arrives, the bank converts it at the agreed rate, whatever the market rate is on that day. The rate you get is not today's spot rate. It reflects the difference in interest rates between the two currencies and the bank's margin. The contract is a commitment, so the amount and the date should match the expected payment as closely as you can. See also the currency hedging page.

For example, an Indian software exporter expects USD 10,000 in three months. She books a forward contract with her bank at a rate of Rs 90 per dollar, a hypothetical rate. If the market rate on the date is Rs 88, the bank still converts at Rs 90, so she receives Rs 9,00,000. If the market rate is Rs 92, she still receives Rs 9,00,000 and does not benefit from the rise.

• Certainty: You know the rupee value of the covered amount in advance, which helps with pricing and cash flow.
• Cost: The forward rate and bank margin affect what you receive. Compare quotes from more than one bank and see how to negotiate FX rates.
• FEMA: Export proceeds must be realised within the period set in Regulation 5 of the FEMA Export and Import Regulations, 2026. A forward contract does not extend that period, so match the contract date to the expected payment and the realisation deadline.
• Tax: Gains or losses on foreign exchange can have accounting and tax effects. See forex gain or loss on export receipts and ask your tax adviser.
• Bank compliance: Banks can ask for documents supporting the underlying export, such as the contract or invoice. Check the requirements with your AD bank before booking.

You book the contract with an authorised dealer bank for a stated amount, currency and date. On the date, the payment is converted at the agreed rate.

1. You estimate the foreign currency amount and the date or period of the expected payment.
2. You ask your AD bank for a forward quote and its documentation and margin requirements.
3. You book the contract, and the bank confirms the amount, rate and delivery date or period in writing.
4. Your client pays, and the foreign currency is credited to your bank.
5. The bank delivers the contract by converting the receipt at the agreed rate and credits the rupees.
6. If the payment is late, early or smaller than planned, you work out the options, such as extension, early delivery or cancellation, with your bank. Charges and conditions vary.

You check a forward contract by comparing the rupees you would receive under the contract with the rupees you would receive at different market rates. The numbers below are hypothetical.

1. Take the expected receipt, for example USD 5,000.
2. Take the forward rate quoted by the bank, for example Rs 90 per dollar. The contract value is 5,000 x 90 = Rs 4,50,000.
3. Compare with a possible market rate on the date, for example Rs 88. At that rate the receipt would be 5,000 x 88 = Rs 4,40,000, so the contract gives Rs 10,000 more.
4. Compare with a higher market rate, for example Rs 92. The receipt would be 5,000 x 92 = Rs 4,60,000, so the contract gives Rs 10,000 less.
5. Check the bank's charges and cancellation terms, since an unused contract can carry costs.
6. Decide how much of the expected receipt to cover. Many exporters cover only the part they are sure to receive.

A spot transaction converts currency at the rate of the day, while a forward contract fixes a rate for a future date. The table compares them.

• Guaranteed profit: A forward contract fixes a rate. It can leave you worse off than the market rate on the date.
• Flexible: The contract is a commitment. Changing the date or amount may carry charges.
• Free to book: Banks price the contract into the rate and may ask for margin or limits.
• Any payment: The contract should match a genuine expected receipt. Check with your AD bank what it needs.
• Only for big exporters: Banks may offer forwards to smaller exporters too, subject to their own terms. Read forward contracts for small exporters.

• Currency hedging: Actions taken to reduce the effect of exchange rate movements on future receipts.
• FX markup: The margin added to the exchange rate when converting foreign currency.
• EEFC account: A foreign currency account in India for eligible exporters.
• FEMA: India's Foreign Exchange Management Act, 1999, which governs export proceeds.
• EDPMS: RBI's system where banks track export entries and their realisation.
• FIRA: A bank advice confirming that a foreign payment was credited to your account.

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

1. RBI, Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026 (FEMA 23(R)/2026-RB), Regulation 2(1)(b) and Regulation 5 (checked 9 Oct 2026)
2. IGST Act, 2017, Section 2 (Definitions), Section 2(6), export of services (checked 9 Oct 2026)