RBI's FX forward book tipped to shrink after touching $200 billion

In August, the Reserve Bank of India’s net forward dollar liabilities reached a record high of $200 billion, according to data released on Wednesday. This surge occurred due to an influx of one-off policy-induced dollar inflows. The figure increased by $63 billion month-on-month, up from the previous record of nearly $137 billion in July.

Market participants anticipate a decline in the stock of forward dollar liabilities as the RBI utilizes dollar-rupee sell/buy swaps to manage the situation. These swaps are believed to aim at shortening the maturity of existing positions and reducing excess rupee liquidity in the banking system. The central bank’s forward book expanded as it employed buy/sell swaps to absorb dollars drawn through measures like discounted hedging facilities for overseas borrowings and foreign-currency deposits from June to September.

This influx of dollars, totaling $143.5 billion, strengthened India’s balance of payments. The measures attracted a significant $133 billion through foreign-currency deposits, which lifted India’s FX reserves to a record high of $785.7 billion. Analysts at DBS suggest that a portion of the existing FX reserves might be allocated to offset the forward liabilities, thereby alleviating concerns about sharp increases in dollar demand due to maturing deposits or debt repayments.

In the near term, the focus will be on managing liquidity, gradually reducing the substantial forward book, and supporting the domestic currency. The central bank has been executing dollar-rupee sell/buy swaps in the foreign exchange market, with maturities primarily in the 3-month to 1-year range. Foreign exchange operations have absorbed approximately $20 billion of excess rupee liquidity, with a significant role played by dollar-rupee swaps.