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

MUMBAI: The Reserve Bank of India’s net forward dollar liabilities ballooned to a record $200 billion in August, per data released on Wednesday, as the central bank absorbed a surge in one-off policy-induced dollar inflows.

Forward liabilities rose $63 billion month-on-month in August after hitting a record high of nearly $137 billion in July.

Market participants now expect the stock of forward dollar liabilities to decline as the RBI deploys dollar-rupee sell/buy swaps, which bankers say are likely aimed at bringing forward the maturity of existing positions while also draining excess rupee liquidity in the banking system.

The central bank’s forward book had swelled as it used buy/sell swaps to absorb dollars drawn by measures including discounted hedging facilities for overseas borrowings and foreign-currency deposits that were in force between June and September this year, and were aimed at strengthening India’s balance of payments.

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Under the arrangement, banks swapped the dollars with the RBI, adding to India’s foreign exchange reserves, while creating a corresponding forward dollar liability for the central bank.

The measures attracted $143.5 billion between June 8 and September 18, with nearly $133 billion coming through foreign-currency deposits.

The inflows lifted India’s FX reserves to a record high of $785.7 billion the week ended September 4.

Analysts at DBS say a portion of existing FX reserves could be earmarked against the forward liabilities, helping to mitigate concerns that deposit maturities or debt repayments could trigger a sharp increase in dollar demand.

“In the near-term, priorities will be to manage liquidity, gradually lower the sizeable forwards book, and support the domestic currency,” they said in a note.

The absorption of inflows was done through buy/sell swaps concentrated in the three- to five-year maturities via a dedicated window opened by the RBI. The central bank has followed that up over the last three weeks with dollar-rupee sell/buy swaps in the foreign exchange market, with maturities largely in the 3-month to 1-year time frame, per bankers.

Foreign exchange operations have soaked up an estimated $20 billion of excess rupee liquidity, with dollar-rupee swaps playing a prominent role.