Over the past two years, India's central bank built one of the world's largest bearish dollar bets to support a persistently weak rupee. It now faces the delicate challenge of unwinding that position without destabilizing the currency market.
Key Highlights
- RBI's short dollar forward book hit a record $106.7 billion before recent trimming began.
- The rupee is on track for an unprecedented ninth straight year of losses against the dollar.
With a spate of recent measures expected to attract foreign capital, the Reserve Bank of India (RBI) has started trimming its massive short dollar forward position - a stock of commitments to sell the greenback at a future date. The book had ballooned to a record $106.7 billion in May, per Bloomberg calculations based on RBI data.
The Balancing Act
The challenge lies in the pace and extent of the unwind. Leaving the contracts in place too long can be costly and prolongs the RBI's forward exposure, while scaling them back too quickly risks diluting the positive impact fresh overseas inflows would otherwise have on the rupee. A misstep could stoke volatility, complicating the RBI's currency defense just as renewed US-Iran tensions drive oil prices higher.
This conundrum has reportedly come up in internal RBI meetings, according to people familiar with the matter. The rupee, which strengthened last month following support measures, resumed declines in July and remains on track for an unprecedented ninth straight year of losses.
What Is a Short Dollar Forward Position?
A short dollar forward position is essentially a commitment by the RBI to sell US dollars and buy rupees at a future date. These transactions ease pressure on the rupee without immediately depleting foreign-exchange reserves. Unwinding the position, however, is the equivalent of buying dollars with rupees — an action that can return pressure on the currency.
An Unusually Rapid Build-Up
While authorities in Indonesia, Malaysia, and elsewhere have also used derivatives to manage exchange rates, the RBI's forward book has grown at a "remarkable" pace - faster than typical even among emerging-market central banks known for heavy intervention, said Rajeswari Sengupta, Associate Professor, Indira Gandhi Institute of Development Research. "A large net short forward position is effectively deferred dollar demand and at some point the RBI will need to buy dollars to settle the forward book - it cannot keep rolling it over forever," she said, warning that the unwinding itself may become a fresh source of rupee depreciation pressure.
A Precedent From Last Year
Last year, the RBI reduced its short forward positions by about $35 billion over six months through August, while allowing the exchange rate to move more freely than under the previous governor's regime. The rupee weakened 0.8% during that period, making it the only currency in emerging Asia to depreciate against the dollar.
Also Read: RBI Announces $5 Bn Forex Swap to Ease Rupee and Liquidity Pressure
Rupee's Rough Ride
The RBI has intervened in both the offshore and onshore currency markets, deepening its offshore presence in late 2024 through heavier trading of non-deliverable forwards. Punishing US tariffs on India in 2025 and the Middle East war earlier this year piled further pressure on the rupee, forcing the RBI to keep adding to its forwards book.
Some of that strain eased last month as India relaxed rules for foreign investment in government bonds and cut taxes on debt returns, with sentiment also boosted by a slump in oil prices following the US-Iran interim peace deal. Seizing on the improved backdrop, the RBI is estimated to have trimmed the offshore portion of its short dollar forward book by $10-15 billion since mid-June, according to traders familiar with the matter.
Renewed Weakness in July
Despite this, the rupee's renewed weakness underscores the RBI's challenge - the currency is down 0.8% against the dollar so far in July, after gaining 0.4% last month. DBS Bank strategists, including Philip Wee, noted that roughly $20 billion in short-term FX maturities are expected to have rolled off the central bank's forward book in the past fortnight, adding that "oil-sensitive currencies, especially the rupee, face renewed volatility as Brent prices extend gains."
At the June post-policy media briefing, RBI Governor Sanjay Malhotra said the central bank does not anticipate future currency pressure but remains prepared for any eventuality, noting that the RBI has adequate reserves and sufficient buffers and would take necessary steps to ensure healthy capital flows and "orderly movement" in the rupee.
New Measures to Attract Capital Carry Their Own Risks
To draw fresh 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 move will enhance headline forex reserves, it also creates equal future liabilities, said Ananth Narayan, a former SEBI board member. "In effect, through a subsidized swap window, the RBI is effectively borrowing expensive 3-to-5-year dollars from the market," he said, warning of potential mark-to-market losses if the rupee weakens further.
Forecasts Point to Continued Pressure
Currency forecasters see little respite ahead. Claudio Piron, head of Asia FX & rates strategy at BofA Global Research, estimates the rupee at 98 per dollar by end-2026, reflecting expectations of three US rate hikes totaling 75 basis points. More broadly, the median estimate in a Bloomberg survey puts the rupee at 95.40 per dollar by year-end. The currency remains the second-worst performer in Asia this year after Indonesia's rupiah, having lost close to 6%.
Madhavi Arora, chief economist at Emkay Global Financial Services, flagged the concentrated maturity profile as a key risk: "The RBI's net short forward position is heavily front-loaded, with nearly $29 billion maturing within three months (as of May) and about $51 billion over a one-year horizon. This concentration creates a material overhang and policy conundrum."
