MUMBAI: Will the Reserve Bank of India (RBI) opt to extend the maturity of its record-high short positions in the dollar forward market rather than let them expire?
Experts believe it must, as unwinding these dollar forward positions could squeeze rupee liquidity and impact foreign exchange reserves.
“When short positions mature, the RBI must sell dollars and absorb rupees from the banking system, tightening liquidity. Given the current economic environment, the central bank cannot afford to let this happen, so it will likely roll over these positions by increasing their maturity,” said Gaura Sengupta, chief economist at IDFC First Bank.
RBI’s net short positions in the dollar forward book stood at an unprecedented $77.5 billion as of January 31, with a significant chunk – $30.6 billion – set to mature within three months to a year. The central bank also engaged in two major buy-sell swaps in February: a $5 billion transaction with a six-month maturity and a $10 billion deal extending for three years.
Why rolling over is the likely strategy
If the RBI allows these positions to mature, it would need to settle its obligations by selling dollars from its reserves in exchange for rupees. This would have two key consequences:
A drain on banking system liquidity: The sale of dollars would absorb rupees from the system, potentially creating a liquidity crunch. This could affect credit growth and overall economic activity.
A reduction in forex reserves: India’s foreign exchange reserves currently stand at $640 billion (as of February 21, 2025), down from a peak of $704 billion in late September last year. While this reserve level provides about 10.5 months of import cover, once the short position in the forward book is factored in, the effective cover drops to just over nine months, raising concerns among investors.
“The import cover of spot reserves is about 10-and-a-half months, but if you adjust for the forward book, it falls closer to nine months,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
This is why rolling over the short positions – extending their maturity instead of settling them – appears to be the more prudent course of action. By doing so, the RBI can spread out the impact over time, reducing immediate pressure on reserves and liquidity.
Market implications
While the RBI has the option to manage currency flows through non-deliverable forwards and other interventions, market participants are beginning to factor the forward book into their assessment of India’s overall forex reserve position.
“At some point, these short positions will start influencing how markets perceive India’s reserve adequacy. The headline forex reserve number could lose some credibility if import cover shrinks too much. Central banks typically aim for at least 10 months of cover to maintain confidence,” said a foreign banker to businessbenchmark.news requested anonymity.
Given these risks, the RBI is expected to continue rolling over its near-term positions and may even shift more of its exposure to longer-dated contracts. By extending maturities, the central bank can avoid a sudden drawdown in reserves while keeping the rupee market stable.
However, if these short positions keep growing, they could pose challenges in the future. The RBI will need to carefully balance its interventions to maintain both forex stability and liquidity in the banking system.
