Managing currency risk: forwards, options and PCFC

This guide is for exporters who quote in dollars, euros or other currencies and want to stop exchange rate moves eating their margin. It covers natural hedges, forward contracts, options, the choice of invoicing currency including rupee invoicing, and how PCFC compares with rupee packing credit.

Know your exposure first

Your exposure starts when you quote a foreign currency price, not when you ship. Between quotation, order, shipment and payment the rupee can move several per cent, which may be more than your margin. List, by currency and month, what you expect to receive from confirmed orders and what you have quoted but not yet won. That schedule is the basis for every hedging decision and is what your bank will ask to see.

Natural hedges

• Match inflows and outflows. If you import raw materials or pay overseas freight in dollars, use dollar export receipts to pay them. Only the net amount is exposed.
• EEFC account. An Exchange Earners' Foreign Currency account lets you keep export earnings in foreign currency and use them later for permitted payments, instead of converting and buying back.
• Set-off. Under the FEMA regulations in force from 1 October 2026, your AD bank can allow export receivables to be set off against import payables to the same overseas party or its group companies, within the realisation period.
• Foreign currency borrowing. Packing credit in foreign currency (PCFC), repaid from export proceeds in the same currency, hedges the amount borrowed. See below.

Forward contracts

A forward contract fixes today the rate at which your bank will buy your foreign currency on a future date or within a date range. It removes uncertainty in both directions: you are protected if the rupee strengthens but do not gain if it weakens.

• The forward rate is the spot rate adjusted by the forward premium, which reflects the interest rate gap between the two currencies. For dollar receivables the premium has usually worked in an Indian exporter's favour.
• Book for the expected payment date, or use an option-period forward that lets you deliver within a window.
• If the buyer pays late, you can cancel and rebook, or extend; any loss or gain on cancellation is settled with you. If the order is cancelled, you bear the cancellation loss.
• Your bank needs a forex or derivatives credit line for you, and will ask for orders, contracts or past export performance as evidence of exposure.

Options

A purchased option, for example the right to sell dollars at a fixed rate, protects you against an adverse move while keeping the gain if the rupee weakens. You pay an upfront premium, which can be significant for longer periods. Options suit quotations where you do not yet know if you will win the order. Structures that involve you selling options to reduce the premium carry open-ended risk and RBI limits which users may sell them; most small exporters should stick to plain forwards and bought options.

Which currency to invoice in

Choice	Who carries the exchange risk	Points to note
US dollar	You	Widely accepted, deep forward market, cheapest to hedge.
Buyer's currency (euro, pound, dirham and so on)	You	Often more competitive with the buyer; check your bank can hedge it at a fair price.
Indian rupee	The buyer	No exchange risk for you, but the buyer must be willing and able to pay in rupees.

Rupee invoicing works through the RBI's Special Rupee Vostro Account (SRVA) framework: the buyer's bank holds a rupee account with a bank in India, and payments are credited to you in rupees. RBI consolidated its SRVA instructions in a circular of 17 July 2026 (A.P. (DIR Series) Circular No. 19). Under the FEMA regulations from 1 October 2026, exports invoiced or settled in rupees have twelve months for realisation instead of nine. Ask your AD bank whether it handles SRVA payments from your buyer's country before you offer rupee prices.

PCFC or rupee packing credit

	Rupee packing credit	PCFC
Interest	Rupee lending rate	Overseas benchmark rate (such as SOFR for dollars) plus your bank's spread; usually lower
Interest subvention	Eligible under the Export Promotion Mission (Niryat Protsahan): 2.75 per cent, capped at ₹50 lakh per IEC per year	Not covered, as the subvention applies to rupee credit
Currency risk	None on the loan; your receivable is still exposed	Loan and receivable are in the same currency, so the borrowed amount is hedged
Risk if things go wrong	Repay in rupees	If the shipment is delayed or cancelled, you may have to buy foreign currency at the market rate to repay

Compare the effective cost for your own numbers with the pre-shipment finance calculator, which includes the subvention.

RBI rules at a high level

• Residents can use forwards, swaps and options with an AD bank to hedge contracted and anticipated exposures, under RBI's directions on risk management facilities. The 2020 framework lets banks allow a user to book contracts up to USD 10 million (notional outstanding) without establishing an underlying exposure; above that you need evidence. Ask your bank whether this limit still applies to you.
• Gains on contracts booked against anticipated exposures are generally passed on only when the underlying cash flow happens.
• In April 2026 RBI restricted non-deliverable rupee derivatives, the rebooking of cancelled contracts and derivative deals with related parties, then withdrew the rebooking and non-deliverable restrictions on 20 April 2026. The related-party restriction was retained in modified form. Rules in this area can change quickly, so check with your bank's treasury desk.

A simple hedging policy

1. Write down what you will hedge, for example a fixed share of confirmed orders as soon as they are booked, and who can approve deals.
2. Price quotations at a rate you can actually achieve, and keep quotation validity short.
3. Hedge confirmed receivables with forwards; consider options only for uncertain flows.
4. Review open contracts against expected receipts every month, and act early on delays.

Common mistakes

• Waiting for "a better rate" instead of following a policy.
• Hedging more than your genuine exposure.
• Signing option structures you do not fully understand.
• Taking PCFC without planning how you would repay if the buyer delays.

Related on Exportsmitra

• Pre-shipment finance calculator
• Export quote builder
• Export Promotion Mission: Niryat Protsahan interest subvention
• Export proceeds: realisation deadlines and EDPMS

Sources

• RBI: Risk Management Facilities, A.P. (DIR Series) Circular No. 29 of 7 April 2020
• RBI: Special Rupee Vostro Accounts, A.P. (DIR Series) Circular No. 19 of 17 July 2026
• RBI: Export credit in foreign currency, benchmark rate (2021)
• RBI: Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026
• Business Standard: RBI partially withdraws curbs on certain rupee derivative trades (20 April 2026)

Last checked 1 October 2026. Rules change: confirm with your bank's treasury desk before you act.