RBI records forward dollar position undermines forex reserves comfort

The Reserve Bank of India's record short US dollar forward position, built over months to support the rupee amid equity outflows and US trade policy worries, is diminishing the comfort offered by its large forex reserves.

The RBI's net short dollar position in forwards and futures hit a record high of $77.5 billion in January 2025, as per data released after market hours on Friday. The data is released with a one-month lag.

From October to January, the Indian central bank's forward dollar sales position increased by more than $60 billion. Meanwhile, India's FX reserves declined from an all-time high of nearly $705 billion in late September to $640 billion.

The simultaneous decline in spot reserves and surge in the forward dollar sales are reflective of the RBI's efforts to manage the rupee in the face of equity outflows and US tariff policy anxieties.

While India's $640 billion spot FX reserves are deemed adequate by economists, the substantial forward dollar sales diminish the overall comfort they provide.

For instance, while calculating import cover, a commonly used measure to gauge the adequacy of FX reserves, economists incorporate the size of forward positions alongside the spot reserves.

India's import cover decreases from 10.7 months to 9.4 months when the RBI's forward position is factored in, Gaura Sen Gupta, an economist at IDFC First Bank, said.

"Forward dollar sales is just a delay and will ultimately be reflected in spot reserves," she said.

"That is why to calculate reserve adequacy, the forward book has to be taken into account."

The size of the RBI's forward book has potential implications for the rupee's outlook.

"A cleaner RBI forward book would be required for the market to regain confidence that INR's return potential has become more two-way," BofA Global Research said in a note.

The unwinding of the forward dollar sales down the line may potentially create an asymmetric risk-reward for the rupee, BofA said.

The rupee was quoting at 87.3600 to the US dollar at 13:30 IST on Monday. It is the second worst-performing major Asian currency year-to-date, trailing only the Indonesian rupiah.