Indian central bank's FX forward book shrinks slightly to $103.3 billion

MUMBAI: The Reserve Bank of India’s net foreign exchange forward book market shrank slightly to $103.3 billion in June, as a reduction of near-tenor dollar liabilities outweighed a rise in longer tenor ones likely reflecting absorption of dollar inflows.

The RBI’s short-dollar forward book shrank $3.3 billion month-over-month by the end of June, driven by a nearly $13 billion reduction in forward dollar sales of up to three month maturities.

The fall in near-tenor liabilities was offset by an over $6 billion dollar rise in liabilities beyond one year, which would reflect flows absorbed under discounted dollar-rupee buy/sell swap facilities introduced to encourage banks to mobilise foreign-currency deposits and overseas borrowings by lenders and state-run firms.

Between June 8 and late-July, the crisis-era policy measures announced to strengthen India’s balance of payments position have drawn inflows worth nearly $40 billion, led largely by foreign currency deposits by overseas Indians.

India’s RBI likely used dollar deposit surge to cut record FX forward book, economists say

During June, the rupee rose 0.4%, its first monthly gain in four months, supported by the policy measures, the removal of taxes on foreign investment in government bonds and a temporary ceasefire in the Middle East that has since collapsed.

Economists reckon that the central bank’s foreign exchange forward book was pared down in July, which would have eroded foreign exchange reserves but the impact was likely offset by inflows from its foreign-currency deposit drive.

India’s foreign exchange reserves rose to a two-month peak of $682.35 billion as of July 24, according to data released earlier on Friday.

As renewed hostilities in the Middle East lifted oil prices in late July, the central bank renewed its defense of the rupee.

Traders say the RBI has complemented dollar sales in the spot and non-deliverable forwards markets with buy/sell dollar-rupee swaps of more than one year’s maturity.

Those swaps are expected to reflect in the data in July, due to be released on August 31, alongside the impact of swaps related to ongoing inflows under policy measures.