RBI likely fine-tuned forex market intervention by slowing dollar sales

By October-end, the RBI's net short position in the forward market stood at $49.2 billion, up significantly from $14.6 billion in September

After creating a short position of almost $50 billion in the forward market till the end of October 2024, the Reserve Bank of India (RBI) seems to have fine-tuned its intervention strategy by going slow in selling dollars in those markets.

 

By the end of October, the net short position of the RBI in the forward market was $49.2 billion, up from $14.6 billion at the end of September. According to market estimates, while the short position in the forward book has further swelled to about $60 billion by the end of November, the extent of sales slowed down. The forward position is a combination of both on-shore and non-deliverable forwards.

 

If the RBI has a short position in the forward market, it means the central bank has to buy dollars in the future to square off the position. This, in turn, would put further pressure on the domestic currency.

 

Data shows that the central bank has been taking a short position in the forward market since March 2024.

 

Market participants said the RBI chose to not roll over the entire amount of these open positions, and decided to cover a portion of them in the preceding week. This decision reportedly contributed to the sharp depreciation of the rupee observed in recent trading sessions.

 

The rupee had witnessed its steepest single-day decline on December 27, in nearly two years, driven by maturing non-deliverable forward and currency futures. The local currency had slumped intra-day to 85.82 per dollar due to the significant dollar demand, prompting the central bank to intervene in the spot market.

 

The rupee hit a new all-time closing low on Tuesday, hitting 85.61 a dollar. In 2024, the rupee depreciated 2.84 per cent against the greenback. 

 

“The RBI data showed that the open positions were around $50 billion in October, then there were reports that it was around $60 billion in November. It has come down from there of course, as some amount matured in December,” said a senior executive at a brokerage firm. “Our estimate is that there should be around $50 billion-$60 billion open position as the RBI did not roll over the entire amount, and that’s why we saw rupee falling to 85.50 per dollar that day,” he added.

 

Additionally, several market observers noted that the RBI’s recent level of intervention in the foreign exchange market is unusually significant compared to its actions in the recent past. They said that this unprecedented scale of activity underscores the central bank’s aggressive approach to managing currency volatility, possibly reflecting heightened concerns about external pressures on the rupee.

 

“I have not seen these many open positions for at least past 10-15 years,” said a dealer at a private bank. “It is being reflected in the rupee’s value, liquidity, and the amount of volatility seen on Friday. The RBI does not have a leg room right now. The Real Effective Exchange Rate (REER) has also moved past 108,” he added.

 

The REER of the Indian Rupee increased to 108.14 in November 2024 from 107.20 in October 2024. This means the rupee appreciated by 0.9 per cent month-on-month (m-o-m) in November.

 

REER, which represents the inflation-adjusted, trade-weighted average value of a currency against its trading partners, is often used as an indicator of external competitiveness.

 

Market participants said that allowing the rupee to adjust at a faster pace would help alleviate the overvaluation pressure, realign the REER closer to its equilibrium level, and reduce the strain on both forex reserves and domestic interbank liquidity.