RBI's $38 Billion Forward Short Signals Rupee Defence Shift

The Reserve Bank of India's forward dollar positions swung to a net short of roughly $38 billion last week, the deepest short on record. The central bank stepped up its defence of the rupee through sell-buy swaps rather than outright spot sales, three traders said.

The structure works like this: the RBI sells dollars in the spot market and simultaneously agrees to buy them back at a future date. That drains rupee liquidity. It doesn't permanently lower foreign-exchange reserves, a pattern the RBI has used in prior depreciation cycles. The net short position in forwards measures the volume of dollars the central bank has promised to repurchase.

The rupee has been under pressure from a strengthening dollar and a widening trade deficit. Portfolio outflows from Indian equities added to the strain. The currency touched a record low of 87.95 per dollar last week before the RBI intervened. The intervention has slowed the pace of depreciation but not reversed it, two of the traders said.

India's foreign-exchange reserves have fallen to about $620 billion from a peak of $704 billion in September 2024, partly due to intervention. The decline accelerated as the RBI shifted from spot sales to swap-based operations. Sell-buy swaps let the central bank defend the currency while keeping its headline reserve figure higher than it would otherwise be.

The short position carries risk. If the rupee stabilises or reverses, the RBI would have to deliver on its forward purchase commitments at a time when the dollar is strong. That could create a second round of pressure on the currency. For now, the RBI is managing the pace of the slide rather than trying to hold a specific line, the traders said.

The RBI's next scheduled policy decision is April 9. The central bank declined to comment.

The swap-based approach differs from the RBI's playbook during the 2013 taper tantrum, when the central bank used dollar sales and cash reserve ratio hikes to defend the rupee. This time, the emphasis has been on smoothing the path rather than building a wall.

The rupee's trajectory depends on dollar direction and capital flows. A weaker greenback or a pickup in foreign buying of Indian equities would reduce the RBI's intervention burden. Until that shifts, the traders expect the central bank to keep using swaps and keep its short position near record levels.

Infosys (Alpha Score 57/100, Moderate on AlphaScala) and Wipro (Alpha Score 46/100, Mixed) are among large-cap IT stocks that could see rupee-linked earnings tailwinds if the currency stays weak, given their dollar-denominated revenue base.