Are you worried that unfavourable fluctuations in exchange rates might cost you dearly while transferring money to India? Mitigating currency risks is a significant challenge for NRIs working abroad and sending money home. Many banks are offering forward contracts to hedge against such a problem.  

To manage exchange rate uncertainties, several banks and financial institutions now offer currency forward contracts- a financial tool that allows NRIs to lock in an exchange rate today for a future date. This ensures that even if rates move unfavorably later, your conversion value remains secure.

This guide explains how forward contracts work, their benefits and risks, and how NRIs can use them effectively to safeguard their wealth.

What is a forward contract?

A forward contract on currencies is a legal agreement between two parties to exchange one specific currency for another at a pre-specified exchange rate. It is a standard B2B financial instrument. For centuries, companies engaged in international trading used such contracts to protect their earnings in foreign currencies from unfavourable changes in the exchange rate over time. 

Recently, many banks have started offering currency forward contracts and similar services to individuals holding NRE and FCNR accounts. Such a facility allows non-resident Indians to lock in an exchange rate of INR with a specified foreign currency for a specific tenure. At the end of that period, account holders can convert their deposits (or earnings) in foreign currency to INR at the locked-in exchange rate, irrespective of the prevailing rates in the currency market. 

Key features of NRI Forward Contracts

• Over-the-counter: Forward contracts are made between two parties, e.g., a bank and its NRI account holder. These are not standardised, like exchange-traded futures or other currency derivatives. 

• Customisable: As these contracts are not standardised, an individual NRI can negotiate customised terms and conditions of their forward contract. Some of these terms and conditions can involve contract tenure, rates of exchange, currencies to be exchanged, etc.  

• Legally enforceable: Once signed, both parties must honor the terms, regardless of market conditions. 

• Minimal cost: Forward contracts do not require margin maintenance, making them low-cost hedging tools.

• Counterparty risk: As a forward contract is signed between two private parties, they carry a slight risk of default, though minimal when dealing with reputed scheduled commercial banks.

How does a forward contract work? 

Here’s a simplified breakdown of how a forward contract progresses from start to finish:

1. Negotiation: It involves both parties negotiating terms and conditions. The common terms include the currencies to be exchanged, the tenure of the contract, and exchange rates, among others. 

2. Signing of contract: A bank and an NRI sign the forward contract once the underlying terms and conditions are final.  

3. Waiting period: This is the period of time between the signing of the contract and the maturity or final settlement date of the contract tenure. 

4. Settlement: At the end of the tenure, the forward contract is settled. It means that upon maturity, the bank converts the foreign currency into INR (or vice versa) at the pre-agreed rate.

Example

Namita, who is working in the USA is required to spend Rs 50 lakh for her daughter's admission to an Indian engineering college. The admission fee is due by January 2026. The USD is currently trading at INR 88 per dollar in the currency market. At this rate, she is expected to arrange approximately US$ 56,820. However, if the USD-INR exchange rate goes down from the current rate by January 2026, she will be required to spend more in USD. It can disturb her personal financial planning. 

If the USD weakens and the rate falls before January, she’d need to send more dollars to meet the Rs 50 lakh requirement. To avoid this risk, she signs a forward contract with her bank to lock the exchange rate at Rs 88 per dollar for settlement on 1st January 2026.

At maturity, the bank converts her USD deposit into INR at Rs 88, regardless of where the market stands then. This helps Mrs. Nanda plan confidently without worrying about currency movements.

Similarly, NRIs can set up reverse forward contracts to convert INR into foreign currency for overseas expenses or investments.

Differences: forward contracts and other derivatives 

There are other derivative instruments, like futures and options, used to mitigate currency risks. Traditionally, large enterprises use currency futures and options to hedge their exposure to foreign currencies. The major differences among forward contracts, futures and options are as follows. 

Benefits of forward contracts 

The major benefits of currency forward contracts for NRIs are,

• Protect wealth from currency risks due to unfavourable exchange rates 

• Enables accurate financial planning for future needs

• Opportunity to earn attractive interest income on foreign currency deposits with forward contracts 

• Zero to negligible costs with no upfront requirement to deposit margin throughout the contract tenure

Risks of forward contracts 

Despite these benefits, forward contracts are not free for risks. Some of the common risks are,

• Opportunity costs: If the exchange rate moves favorably, you may miss potential gains since the rate is locked. 

• Default risk: Though rare with reputed banks, the counterparty could theoretically fail to honor the agreement.

• Inflexible: Once negotiation is complete, forward contracts do not allow any changes in the underlying terms and conditions.   

When should NRIs consider Forward Contracts?

Currency forward contracts are beneficial for NRIs in the following conditions. 

• Plan to send money to India in INR at a future date

• Need to convert INR to other currencies for overseas expenses

• Want to hedge investment inflows/outflows in both INR or foreign currencies

• Have predictable financial obligations like tuition, property purchase, or family expenses

Conclusion

Forward contracts are an excellent way for NRIs to hedge currency risks and avoid monetary losses arising from changing exchange rates. Many banks in India, such as Axis Bank and ICICI Bank, offer these services for NRE and FCNR accounts, often with a minimum deposit of around Rs 5 lakh or equivalent.

By locking in your desired exchange rate today, you can secure your savings and plan future financial goals with confidence.

Are you curious to learn more about how to negotiate and enter into a forward contract to protect your wealth? Reach out to us- we'd love to hear your thoughts.

Frequently Asked Questions

1. Are there any specific eligibility requirements or documentation needed for NRIs to book a forward contract?

   Yes, NRIs must typically hold an NRE, FCNR, or other eligible account with the bank and provide documentation proving their overseas residence and the underlying exposure, such as expected remittances, investment outflows, or property purchases. Some banks may require a valid contract or evidence of a future foreign currency obligation, and RBI/SEBI guidelines must be followed.

   
   

2. What if I pay more advance tax than required for the financial year?

   If you pay more advance tax than your actual liability, you can claim a refund when filing your income tax return. The excess amount will be refunded by the Income Tax Department after processing your return.

   
   

3. Do NRIs need to pay advance tax on global income?

   No, NRIs only pay advance tax on income earned, accrued, or received in India; global income is not liable for Indian advance tax.