India’s $700 billion plus FX reserve pile, leaner forward book bolster rupee shield

MUMBAI: India’s foreign exchange reserves topped $700 billion last week to hit a 9-month high, which, alongside the central bank’s shrinking forward book, cements the rupee’s defences at a time when U.S. trade policy uncertainty looms, analysts said.

Economists assess the Reserve Bank of India’s (RBI) capacity to intervene in the foreign exchange market by evaluating its foreign exchange reserves and forward book positions, both of which are on a healthy trajectory.

India’s foreign exchange reserves rose to $702.8 billion as of June 27, up $4.9 billion week-on-week, as per data released on Friday.

The reserves had declined to a multi-month low of $624 billion in late January but have now recovered to within touching distance of their all-time high hit last year.

At the same time, the RBI’s short-dollar position in the forward market, which had risen to a record $88.7 billion in February, declined to $65.2 billion by May. The data is released with a one-month lag.

Substantial short positions in the forward dollar book offset some of the cushion offered by headline FX reserves, since they imply future commitments that could drain the reserves.

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The RBI’s forward book shrank by $19 billion over April and May, while its net dollar selling during the same period was just $3.2 billion.

This suggests the RBI is allowing a portion of the forward book to unwind and is offsetting the impact on rupee liquidity and FX reserves by purchasing dollars in the spot market, said Gaura Sen Gupta, an economist at IDFC First Bank.

“The reduction in forward book size and sufficient FX reserves are a positive for the INR. It increases the RBI’s ability to intervene if required,” Sen Gupta said.

The RBI intervenes in foreign exchange markets to curb excessive volatility. The central bank did not respond to an email seeking comment.

The rupee is among emerging market currencies that have experienced heightened volatility since April 2, when U.S. President Donald Trump announced sweeping tariffs, only to pause the steep hikes for 90 days.

U.S. and Indian trade negotiators are pushing to finalise a trade deal before the July 9 deadline, and a failure could heighten volatility for the rupee.

A change in the composition of the RBI’s forward book towards more onshore positions than non-deliverable forwards is one more positive for the rupee, according to analysts.

Positions in the non-deliverable forward market, unlike their onshore counterparts, are typically concentrated in near-tenors and need to be rolled over frequently, adding to volatility.

This shift “reduces the pressure on the RBI to unwind the short dollar positions very aggressively,” Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership, said in a note.

“Any decision to unwind the book should be based on balance of payment flows to ensure optics of FX reserves is managed well.”