The Reserve Bank of India (RBI) significantly increased its net short forward position in the currency market to a record $106.6 billion in May, up from $95 billion in April. This substantial intervention was primarily to defend the rupee, which had been hitting successive lifetime lows amid volatility caused by the West Asia conflict. The rupee touched a record low of 96.96 per dollar on May 20, and the RBI's interventions were crucial in preventing it from weakening past the psychologically significant 97 per dollar mark.
The rupee has since appreciated from its record lows, closing at 94.66 per dollar on a recent Tuesday, compared to its previous close of 94.54 per dollar. This recovery is attributed to capital inflows following coordinated measures by the RBI and the government to attract foreign investment. Market participants anticipate an inflow of $40-$70 billion through ECB and FCNR(B) schemes.
Now, the central bank faces a decision regarding its record short forward position. There is a consensus that the RBI will likely use the anticipated hefty inflows to either retire its net short forward position or to rebuild its foreign exchange reserves, which currently stand at $672 billion, down from their peak of $728 billion in late February.
Previous data indicates the RBI's net short dollar position surged to $103 billion in March, reflecting intense intervention in both onshore and offshore forward markets due to rising crude prices and geopolitical tensions. At that time, the central bank's total short positions were split between $51.4 billion in the up to one-year bucket and $52.8 billion in the above one-year category. The RBI's use of non-deliverable forwards (NDFs) has become a key tool to influence the exchange rate without immediately depleting foreign exchange reserves, signaling policy intent and stabilizing the currency during volatile periods.
Despite the rupee's recent strengthening, the large derivatives book could pose future challenges, as maturing contracts will create recurring demand for dollars, potentially capping a sustained rupee recovery. Analysts from Goldman Sachs Group Inc. believe the rupee's slide may be nearing a floor due to the recent policy measures, which included scrapping taxes on overseas investment in government securities and making more bonds available to foreign investors. The rupee's weakness has been exacerbated by oil price shocks, as India heavily relies on crude imports.
