RBI's net forward book shrinks $34.94 bn in first 3 months of FY23

The multi-pronged defence of the rupee is behind the sharp fall in RBI's long forward position

The Reserve Bank of India’s (RBI’s) outstanding net forward purchases of US dollars fell by more than 50 per cent from the last quarter of FY22 to $30.86 billion in the June quarter (Q1). The net forwards position was at $65.79 billion at the end of the last fiscal year.

The purchases fell by $18.33 billion in June as the central bank intervened in both the forwards and the spot market in order to protect the rupee from excessive depreciation in the face of a widening trade deficit.

Data in the RBI’s August 2022 Bulletin show that the bank’s net forward purchases at the end of May stood at $49.19 billion.

The decline in the outstanding net forward purchase position is due to the central bank taking delivery of its maturing forward positions.

Over the past few months, the RBI has significantly expanded the scope of its interventions in the foreign exchange market to include activities in both the forwards and the futures segments. These are in addition to its heavy interventions through dollar sales in the spot market.

“My sense is that they (the RBI) have used some of the forwards which had matured and they didn’t roll it over because they were defending the rupee through forwards as well as spot market interventions,” Soumyajit Niyogi, Director, India Ratings & Research told Business Standard.

“We had a high capital account deficit as well as a current account deficit. But if you see the movement in forex reserve, it’s not been so high. So, the difference is because they have used the forwards and that’s the reason why the foreign exchange reserves haven’t depleted too much even in the face of a high balance of payments deficit,” he added.

The August Bulletin also shows that the RBI had sold $3.7 billion in the spot market in June.

The rupee depreciated 1.3 per cent against the US dollar in June, weakening past the 78 per dollar mark for the first time ever, as India recorded an all-time high trade deficit of $26.1 billion that month. So far in 2022, the rupee has depreciated 6.8 per cent against the dollar.

The RBI’s total headline foreign exchange reserves were at $570.74 billion as of August 12, much lower than $631.53 billion as on February 25 – around the time Russia invaded Ukraine.

The level of the RBI’s headline reserves as of August 5 - $573 billion - was equivalent to 9.4 months of imports projected for 2022-23, the central bank said.

As of March 4, just about a week after the Ukraine war broke out, the RBI’s reserves were at $631.9 billion, accounting for 12.4 months of imports projected for the previous fiscal year.