Reserve Bank's $239 billion forward position to limit rupee appreciation

The Reserve Bank of India's (RBI) net short position of $239 billion in the forward market may limit the appreciation of the Indian rupee in the near future. According to an economic research report by IDFC First Bank, foreign portfolio investor (FPI) inflows have shown improvement during the month of November, which has made investor sentiment towards the Indian market positive. Nevertheless, the position of the RBI's forward book will act to prevent any major surge in the rupee's value.

As per data up to September 2026, a net dollar short position of $239 billion has been recorded in the RBI's forward book. This position indicates that when the buy-sell swaps mature, the RBI will have to fulfill its commitment to provide dollars. For this, the central bank will have to accumulate dollars as capital inflows improve, which will limit the increase in the rupee's value. According to the report, out of this $239 billion position, $40 billion will mature within one year, $56 billion in one to three years, and the remaining $143 billion in three to five years. These long-term positions are primarily linked to the FCNR (B) scheme.

This large negative forward book means that the RBI will have to accumulate dollars to meet its obligations when the swaps mature. Consequently, any increase in capital inflows will be absorbed by the RBI, which will keep the rupee's decline against the dollar limited. Furthermore, this large forward position also limits the RBI's ability to sell dollars in the spot market, as the capacity to sterilize such sales through additional buy-sell swaps is limited. Over the next few years, the central bank's main focus will be on gradually reducing its forward book.

As stated in the report, if tensions between the US and Iran decrease and there is an improvement in American AI stocks, the rupee's value could increase in the short term. However, competition with the US for global capital and high American Treasury yields will limit the sustained appreciation of the rupee. IDFC First Bank estimates that the rupee will trade at the 92-94 level per dollar by December 2026, which could fall to 94-95 by March 2027 and reach 96 by June 2027.

Highlighting the pressure on India's external balance, the report stated that the Balance of Payments (BoP) is in a surplus of $65 billion in the first six months of the financial year 2027. However, without the RBI's swap window, the underlying BoP deficit would have been $85 billion. The central bank's FCNR (B), external commercial borrowings, and overseas foreign currency borrowing swap windows have attracted a cumulative inflow of $150 billion, which will have to be repaid in three to five years. In October 2026, the import cover fell to seven months, compared to 10 months a year ago.

The Reserve Bank of India (RBI) is India's central bank, which manages the country's monetary policy and regulates the banking sector. It uses various market intervention tools to manage foreign exchange reserves and maintain stability in the rupee's value. Historically, the RBI has played an active role in the foreign exchange market through forward swaps and the spot market to reduce volatility.