By Bhaskar Dutta, Subhadip Sircar and Anup Roy
Over the past two years, India’s central bank built one of the world’s largest bearish dollar bets to support a persistently weak rupee. It now faces the challenge of unwinding that position without destabilizing the currency market.
With a spate of recent measures expected to attract foreign capital, the Reserve Bank of India has started trimming its massive short dollar forward position, a stock of commitments to sell the greenback at a future date. The book had ballooned to a record $106.7 billion in May, as per Bloomberg calculations based on RBI data.
The balancing act lies in the pace and extent of the unwind. Leaving the contracts in place for too long can be costly and prolongs the RBI’s forward exposure, while scaling them back too quickly risks diluting the positive impact fresh overseas inflows would otherwise have on the rupee. A misstep could potentially stoke volatility, complicating the RBI’s currency defense just as a renewed flareup in US-Iran tensions drives oil prices higher.
The conundrum has come up in internal meetings at the central bank, where officials have discussed how to reduce the position, according to people familiar with the developments, who asked not to identified discussing private matters. The rupee, which strengthened last month following the support measures, has resumed declines in July and remains on track for an unprecedented ninth straight year of losses.
A short dollar forward position is essentially a commitment by the RBI to sell the US currency and buy rupees at a future date. The transactions can ease pressure on the rupee and have the benefit of not immediately depleting foreign-exchange reserves. Unwinding the position is the equivalent of buying dollars with rupees, which can return pressure on the Indian currency.
Authorities in Indonesia, Malaysia and elsewhere have also relied on derivatives to manage exchange rates. However, the RBI’s forward book has grown at a “remarkable” pace, faster than is typical even among emerging-market central banks known for heavy intervention, said Rajeswari Sengupta, an associate professor at Indira Gandhi Institute of Development Research.
“A large net short forward position is effectively deferred dollar demand and at some point the RBI will need to buy dollars to settle the forward book — it cannot keep rolling it over forever,” she said. “This unwinding itself may become a fresh source of rupee depreciation pressure, over and above existing pressures.”
For investors, how quickly the RBI pares the short dollar forward book will also be a gauge of its confidence that the rupee can weather external shocks with less official support.
Last year, it reduced the positions by about $35 billion in six months through August while allowing the exchange rate to move more freely than under previous governor Shaktikanta Das’ regime. The rupee weakened 0.8% during the period, making it the only currency in emerging Asia to depreciate against the dollar.
Rupee troubles
India’s central bank intervenes in both the offshore and onshore currency market. It deepened its presence offshore in late 2024, ramping up its trading of non-deliverable forwards to buoy the rupee in the face of a resurgent dollar. Then, punishing US tariffs on India in 2025 and the Middle East war early this year piled further pressure on the rupee, forcing the RBI to keep adding to its forwards book.
Some of that strain eased last month as India relaxed rules for foreign investments in government bonds and cut taxes on debt returns. Sentiment was also boosted by the slump in oil prices after the US and Iran signed an interim peace deal.
Seizing on the improved backdrop, the RBI is estimated to have trimmed the offshore portion of its short dollar forward book by $10 billion to $15 billion since mid-June, according to traders familiar with the developments, who asked not to be identified because they aren’t authorized to speak publicly.
But the rupee’s renewed weakness underscores the challenge the RBI is facing. The currency is down 0.8% against the greenback so far in July, after gaining 0.4% last month.
“In the past fortnight, short-term FX maturities worth about $20 billion are expected to have rolled off the central bank’s forward book,” DBS Bank Ltd. strategists including Philip Wee wrote in a report. “Oil-sensitive currencies, especially the rupee, face renewed volatility as Brent prices extend gains” they said, adding that recent losses defy “expectations of a near-term appreciation bias on inflows.”
The central bank didn’t respond to an email seeking comments.
In response to a question at the June post-policy media briefing on whether the RBI’s interventions in the forward market and rupee support measures signaled expectations of future strain on the currency, Governor Sanjay Malhotra said the central bank does not anticipate such pressure but remains prepared for any eventuality.
The RBI has adequate reserves and sufficient buffers, and would take necessary steps to ensure healthy capital flows and maintain “orderly movement” in the rupee, he said at the time.
To attract capital, the RBI has offered to fully cover hedging costs for banks raising three- to five-year foreign-currency deposits from non-resident Indians. While this will “enhance headline foreign-exchange reserves, it will create equal future liabilities that will require repayment,” said Ananth Narayan, a former board member of the Securities and Exchange Board of India, the capital markets regulator.
“In effect, through a subsidized swap window, the RBI is effectively borrowing expensive 3-to-5-year dollars from the market,” he said. “If the rupee weakens against the greenback over this period, the central bank would face mark-to-market losses on these fresh forward commitments.”
Currency forecasters see little respite for the rest of the year.
Claudio Piron, head of Asia FX & rates strategy at BofA Global Research, estimates the rupee at 98 per dollar by the end of 2026. That reflects expectations of three US rate hikes totaling 75 basis points, which would bolster the dollar.
More broadly, the median estimate in a Bloomberg survey of forecasters is for the rupee to end the year at 95.40 per dollar. That’s versus 95.39 on Thursday. The currency is the worst performer in Asia this year after Indonesia’s rupiah, having lost close to 6%.
“The RBI’s net short forward position is heavily front-loaded, with nearly $29 billion maturing within three months (as of May) and about $51 billion over a one-year horizon,” said Madhavi Arora, chief economist at Emkay Global Financial Services Ltd. “This concentration creates a material overhang and policy conundrum.”
 "RBI faces $100 billion unwinding challenge after record defence of rupee")
