RBI's Massive FX Forward Book Caps Rupee Rally: Global Flows Limited by Interest Hedges
The rupee, having recently recovered against the dollar following oil price dips, is facing headwinds due to the sheer scale of the Reserve Bank of India's short-dollar forward book. Analysts indicate that central bank unwinding and complex interest payment hedges are set to cap any significant appreciation in the Indian Rupee (INR).FX Buffer Overshoot: Why RBI’s Forward Book Limits Rupee Gains
The RBI's short-dollar forward book has reached an all-time high, estimated by foreign bank officials at nearly $110 billion. This figure is a sharp increase from the $96 billion reported in April, reflecting persistent intervention across both domestic and non-deliverable forward markets to support the rupee.This growing commitment is driven by banks passing on currency risk. Foreign currency inflows raised by banks are being channeled through swaps to the RBI. State-run enterprises and various lenders are also utilizing dollar-rupee swaps with the central bank to hedge their external commercial borrowings.
Analysts from Goldman Sachs stated that they do not expect significant appreciation in the INR based on these flows. The massive cash flows generated are anticipated to be absorbed by the RBI through rebuilding its FX buffers, which includes actively unwinding this substantially large short dollar forward book.
Reserves and Interest Costs Dragging Down Rupee’s Momentum
Despite the rupee recovering to 94.50 per dollar from a low near 97 last month, the country's foreign exchange reserves have witnessed a decline. India's FX reserves stand at $681.6 billion, down from a peak of $728.5 billion recorded in March.Sakshi Gupta, principal economist at HDFC Bank, noted that the drive by the RBI to bolster its FX reserves, coupled with the sizable overhang of the forward book, is expected to act as a limiting drag on the rupee's upside trajectory.
Shrinking this massive forward booking requires the central bank either to purchase dollars in the forward market or allow existing contracts to mature. Allowing positions to mature is equivalent to an outright dollar purchase, utilizing these maturing funds toward unwinding obligations that stood at $44.6 billion as of April 2026.
Hedging Interest Obligations Affects Derivatives Market
The process of hedging interest obligations on foreign currency deposits is set to be another factor capping the rupee's momentum. Bankers estimate deposit inflows are around $50 billion, which means banks must hedge nearly $12 billion via forward dollar purchases. This calculation assumes a 6% annual interest rate over an average maturity of four years.This concentrated hedging demand holds significant implications for both spot and forward premiums in the currency market. Sameer Karyatt, executive director at DBS Bank India, suggested that this necessary hedging is expected to steepen the forward curve, particularly as banks seek to hedge longer-term interest payments.
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