Mumbai: The Reserve Bank of India’s (RBI) use of forward market interventions to support the rupee has crossed the $110 billion mark, reaching a record level in recent weeks as the central bank intensified efforts to counter pressure on the domestic currency. According to people familiar with the developments, the RBI’s net-short dollar position has risen to between $110 billion and $115 billion across onshore and offshore markets.
The increase reflects the central bank’s growing reliance on currency market interventions following the rupee’s sharp depreciation and heightened volatility driven by global economic uncertainties and rising crude oil prices.
RBI expands forward dollar interventions
The RBI’s net-short dollar book measures the extent to which the central bank has sold dollars forward against its foreign exchange reserves. According to sources, the position stood at $95.3 billion in April after touching a then-record $103.1 billion in March.
In recent weeks, however, the figure has climbed significantly, surpassing the $110 billion threshold for the first time.
Market participants say the RBI stepped up its intervention strategy after the rupee weakened sharply and nearly touched the 97-per-dollar level on May 20, one of its weakest levels on record.
The central bank is believed to have conducted a substantial portion of these interventions through the offshore non-deliverable forwards (NDF) market.
NDF market helps preserve reserves
The RBI’s growing use of non-deliverable forwards allows it to influence the exchange rate without immediately drawing down foreign exchange reserves.
NDF contracts are settled without the actual delivery of dollars, enabling the central bank to send strong signals to currency markets while conserving reserves.
Economists note that such interventions can help stabilise exchange rates during periods of volatility and discourage speculative pressures against the rupee.
The RBI has increasingly relied on this mechanism over the past few years as offshore currency markets have gained importance in determining rupee movements.
Oil prices add pressure on rupee
The rupee has faced sustained pressure due to rising crude oil prices and geopolitical tensions affecting global energy markets.
India remains heavily dependent on imported crude oil to meet its energy requirements. As oil prices rise, refiners require more dollars to pay for imports, increasing demand for the US currency and exerting downward pressure on the rupee.
Market observers say the recent conflict involving Iran has contributed to higher oil prices, intensifying pressure on India’s currency and foreign exchange reserves.
The rupee has repeatedly touched record lows this year as importers increased dollar purchases to manage rising energy costs.
Government and RBI measures offer support
Despite the pressure, analysts believe recent measures announced by the government and the RBI could provide support to the rupee by attracting fresh capital inflows.
The coordinated initiatives announced last week are aimed at boosting foreign investment and improving liquidity conditions in financial markets.
A stronger inflow of foreign capital could help offset external pressures and reduce the need for large-scale intervention by the central bank.
Market participants are closely watching whether these measures succeed in stabilising investor sentiment and supporting the domestic currency.
RBI uses mix of short-term and long-term contracts
Sources indicated that the RBI has primarily sold offshore dollars through short-term contracts with maturities ranging from one to three months.
At the same time, the central bank has reportedly entered into longer-term onshore currency swaps extending beyond one year.
These swaps help replenish liquidity in the banking system, offsetting some of the liquidity drain caused by direct dollar sales aimed at supporting the rupee.
Analysts say the strategy allows the RBI to balance currency stabilisation efforts while maintaining adequate liquidity in domestic markets.
Governor reiterates stance on volatility
RBI Governor Sanjay Malhotra recently reiterated that the central bank does not seek to prevent market-driven movements in the rupee but intervenes to curb excessive volatility.
According to the governor, exchange rate fluctuations are sometimes driven by speculative activity that may not reflect underlying economic fundamentals.
The RBI’s intervention strategy, therefore, focuses on ensuring orderly market conditions rather than defending any specific exchange rate level.
Growing derivatives book poses challenges
While forward interventions have helped support the rupee, analysts caution that the expanding derivatives position could create future challenges.
As forward contracts mature, they generate recurring demand for dollars, which may limit the scope for a sustained appreciation of the rupee.
Analysts at Goldman Sachs believe that any future capital inflows may be utilised by the RBI to gradually unwind its large short-dollar position and rebuild foreign exchange reserves.
Such a strategy would strengthen the country’s reserve buffer while reducing the central bank’s exposure to future market risks.
Foreign exchange reserves decline
India’s foreign exchange reserves stood at approximately $682.3 billion during the week ending May 29.
The reserves have reportedly declined by more than $40 billion since the escalation of geopolitical tensions earlier this year, reflecting both market interventions and valuation changes.
Despite the decline, India continues to maintain one of the world’s largest foreign exchange reserve holdings, providing an important cushion against external shocks.
Conclusion
The RBI’s record dollar intervention programme underscores the challenges posed by global uncertainty, rising oil prices and pressure on the rupee. While the central bank’s aggressive use of forward contracts has helped stabilise the currency, market participants will closely watch future capital flows, reserve levels and policy measures to assess the sustainability of these interventions in the months ahead.