India central bank's FX forward book balloons to over $100 billion as Iran war pummels Indian rupee

MUMBAI: The Reserve Bank of India’s short dollar positions in the FX market ballooned to a record high $104 billion in March, data showed on Thursday, highlighting its efforts to defend the rupee from the threat posed by the Iran war to India’s economic outlook.

The RBI’s short-dollar forward book expanded by $26.5 billion month-on-month by the end of March. The size of the forward book had previously peaked at $88.7 billion in February last year.

A surge in energy prices spurred by the U.S.-Iran war has sent the rupee to a series of record lows. In the month to which the data pertains, the currency had declined over 4% and touched its then all-time low of 95.21.

While using the forward market allows more flexibility in market interventions, limits volatility and smoothens the impact on rupee liquidity, analysts have also warned that it can become a potential drag on the currency.

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Even if fundamentals improve, the winding down of such positions could spur fresh dollar demand in the market.

“The significant outflow of FPI equity investments at over USD 20bn YTD, together with a ramping up of India’s oil import bill, alongside a hefty short USD forward book remain major constraints on the currency,” analysts at Barclays said in a note.

In addition to its market interventions which include dollar sales in the spot, forwards and non-deliverable forwards market, the RBI has also deployed rare regulatory measures to shield the rupee in recent weeks. These measures triggered a fleeting rally in the local currency, before a resurgence in crude oil prices put the rupee under pressure once again.

Over the year so far, the rupee has declined more than 5%, extending losses to hit a record low of 95.33 per dollar on Thursday.