RBI Reduces Forward-Dollar Short Position from $90Bn peak to $53Bn

The Reserve Bank of India (RBI), with its aim to stabilise the rupee amidst the global uncertainty contagion, has been strategically selling forward dollars for quite some time now (Fortune India). Over the past one year, RBI has slashed its forward dollar currency bet while strengthening its dollar reserves (Business Standard, Kotak Securities). The RBI has unwound its net forward-dollar short position from ~$90 billion in February, to $72.4 billion in April, further falling to $65.2 billion in May and to $60.3 billion, $57.9 billion and $53 billion by June, July and August 2025, respectively. Furthermore, the Central Bank of India has been allowing the maturities to lapse, despite the rupee facing external pressures (Business Standard).

Earlier the RBI intervened with its multi-pronged strategy. This calibrated reduction has signalled a shift in the central bank's strategy, moving from aggressive intervention to a more measured approach in managing the rupee's volatility (Kotak Securities).

Rationale behind RBI's Move: Measured Reversal with Gradual Unwinding

The RBI's substantial build-up of the forward-dollar short position earlier in the year was intended to relieve the immense pressure on the Indian rupee. The primary objective was to stabilise the rupee and prevent a disorderly depreciation.

A combination of global and domestic factors has impacted the rupee volatility. There are persistent capital outflows, uncertainty over the US tariffs, the protracted Russia-Ukraine conflict, and escalating tensions in the Middle East. These have necessitated the RBI's intervention across the spot, futures, and forward markets.

However, the central bank has since initiated a "measured reversal" rather than a sharp pivot (Business Standard). Instead of aggressively unwinding its positions, the RBI has been allowing many of the short-term forward contracts to mature. This gradual unwinding is also accompanied by a tactical infusion of rupee liquidity into the system. For this, the RBI infused durable rupee liquidity through open market operations (OMOs) to counteract the impact of the maturing forward contracts (The Economic Times).

Impact on Currency Reserves: A Settlement Ropewalk

The forward market interventions had helped to cushion the rupee from sharp falls. However, the large outstanding short positions raised concerns among analysts. These forward commitments were seen as effectively eroding the “usable” portion of India’s otherwise robust foreign exchange reserves. This can be a concern as these future obligations would ultimately require settlement in dollars (Business Standard).

This pressure on the reserves is also evident in the data (Bloomberg). India’s foreign exchange reserves stood at $688.871 billion on August 1, a significant drop from $699.736 billion on July 4 (Moneycontrol). In a move that underscored the pressure on the currency, the RBI did not purchase any dollars from the spot market in July, a first in over 11 years. Instead, it sold $2.54 billion during the month to defend the rupee (CNBC TV18). Thus, the RBI intervened by selling dollars rather than buying them to stabilise the pressured Indian rupee.

What Economists Perceive: A Need to Look at a Cleaner RBI Forward Book

Economists have been closely scrutinising the RBI's forward book and its implications for the economy. The concern was that the large short position was diminishing the comfort provided by the headline forex reserve numbers. It was suggested that, when the forward position is factored in, India's import cover, which is a key measure of reserve adequacy, could decrease (Reuters). Furthermore, the forward book was taken into account to calculate the adequacy of the reserves as the forward dollar sales can be simply a delay and can consequently reflect in spot reserves. Also, the unwinding of the forward dollar sales, could create an asymmetric risk-reward for the rupee. Thus, the sentiment in the market is that a cleaner forward book is essential for restoring confidence.

Final Word: A Steady Hand to Balance Rupee Stability and FX Reserve Preservation

The RBI's strategy of paring back its forward-dollar short position has been a delicate balancing act. On one hand, the RBI needs to ensure the stability of the Indian rupee in the face of global uncertainties. On the other, it has to preserve its foreign exchange reserves and manage domestic liquidity conditions.

The recent reduction in the forward book was achieved primarily through the natural maturing of contracts. This suggests that the RBI is navigating this complex environment with a steady hand.

For Indian traders and investors, the major takeaway is that the RBI has remained vigilant. The central bank seems to be prepared to use all the tools at its disposal to maintain macroeconomic stability. However, the path of the rupee might continue to be influenced by a host of factors, from global geopolitical developments to domestic economic performance. The central bank's actions in the coming months can be crucial in shaping the currency and broad financial markets trajectory.

Sources:

Business Standard
Reuters
CNBC TV18
The Economic Times
Fortune India
Bloomberg
Kotak Securities
Moneycontrol