The Reserve Bank of India's record short US dollar forward position, built over months to support the rupee amid equity outflows and US trade policy concerns, is eroding the comfort provided by the country's large forex reserves.
The RBI's net short dollar position in forwards and futures reached a record high of $77.5 billion in January 2025, according to data released after market hours on Friday. The data is released after a one-month lag.
Between October and January, the Indian central bank's forward dollar sales position increased by more than $60 billion. Meanwhile, India's foreign exchange reserves fell from a record high of nearly $705 billion in late September to $640 billion.
The simultaneous decline in spot reserves and surge in forward dollar sales reflect the RBI's efforts to keep the rupee stable in the face of equity outflows and US tariff policy concerns.
While economists believe India's $640 billion spot foreign exchange reserves are adequate, the significant forward dollar sales reduce the overall comfort they provide.
For example, when calculating import cover, a commonly used measure of FX reserve adequacy, economists consider the size of forward positions in addition to spot reserves.
According to Gaura Sen Gupta, an economist at IDFC First Bank, India's import cover falls from 10.7 months to 9.4 months when the RBI's forward position is taken into account.
"Forward dollar sales is just a delay and will ultimately be reflected in spot reserves," she informed us.
"That is why to calculate reserve adequacy, the forward book has to be taken into account."
The size of the RBI's forward book could influence the rupee's outlook.
"A cleaner RBI forward book would be required for the market to regain confidence that the INR's return potential has become more two-way," BofA Global Research stated in a report.
The unwinding of forward dollar sales could result in an asymmetric risk-reward for the rupee, according to BofA.
The rupee was trading at 87.3600 per US dollar at 13:30IST on Monday. It is the second-worst performing major Asian currency this year, trailing only the Indonesian rupiah.
