After record rupee defence, RBI faces $100B challenge
What's the story
The Reserve Bank of India (RBI) is facing a major challenge in unwinding its massive short dollar position without destabilizing the currency market. In the last two years, the central bank has built one of the world's largest bearish dollar bets to support a weak rupee. Now, it has to trim this position carefully, or risk further weakening of the Indian currency.
Position details
RBI's forward position hits record $106.7B
The RBI's short dollar forward position, a commitment to sell US currency and buy rupees at a future date, had reached a record $106.7 billion in May. This was revealed by Bloomberg calculations based on RBI data. While these transactions can ease pressure on the rupee without immediately depleting foreign-exchange reserves, unwinding this position could return pressure on the Indian currency.
Growth concerns
Forward book has grown at 'remarkable' pace
Rajeswari Sengupta, an associate professor at Indira Gandhi Institute of Development Research, has noted that the RBI's forward book has grown at a "remarkable" pace, faster than even emerging-market central banks known for heavy intervention. She warned that this large net short forward position is "effectively deferred dollar demand" and will eventually require the RBI to buy dollars to settle the forward book.
Confidence assessment
Measure of RBI's confidence in rupee
The speed at which the RBI reduces its short dollar forward book will be a measure of its confidence in the rupee's ability to withstand external shocks with less official support. Last year, it cut positions by about $35 billion in six months through August while letting the exchange rate move more freely than under previous governor Shaktikanta Das' regime. However, this strategy led to an 0.8% depreciation of the rupee against the dollar during that period.
Market interventions
Increase in offshore presence
The RBI intervenes in both the offshore and onshore currency markets. It increased its offshore presence in late 2024 by trading non-deliverable forwards to support the rupee amid a stronger dollar. However, US tariffs on India in 2025 and the Middle East war early this year further pressured the rupee, forcing RBI to increase its forwards book.
Market measures
RBI offers to cover hedging costs for banks
To attract foreign capital, the RBI has offered to fully cover hedging costs for banks raising three- to five-year foreign-currency deposits from non-resident Indians. While this will "enhance headline foreign-exchange reserves, it will create equal future liabilities that will require repayment," Ananth Narayan, a former board member of the Securities and Exchange Board of India said. This move comes as the rupee continues its downward trend in July after a brief recovery last month.