Why RBI dialled up dollar sales in the forward market last quarter

Sales in the forward market went up by $55 billion during the quarter, with $68 billion outstanding net forward sales at the end of December. During the same period, RBI sold $44 billion in the spot market, data from the central bank’s February Bulletin showed. The biggest sales were in October when RBI sold $34 billion in the forward market, and $9 billion in the spot market.

“RBI intervention data suggests a possible shift in strategy from spot market interventions towards forward contracts. This approach may aim to minimize the impact on rupee liquidity while keeping currency volatility in check,” said Anindya Banerjee, head of currency & commodity research, Kotak Securities.

RBI parked dollars for forward maturities beyond three months and up to one year in December, bulletin data showed. RBI parked $9.8 billion in this maturity basket as on 31 December. Typically, RBI parks dollars in the one to three month bucket.

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“Till late last year, the bulk of the short forward position by the RBI was in the offshore non-deliverable forwards market. But over the last few months there has been a shift to onshore forex swaps market with a view to sterilizing this intervention to support liquidity. On 31 January, RBI did $5 billion forex swaps in the onshore forward market,” a forex dealer said on the condition of anonymity.

“RBI has been conducting market forex swaps in longer tenor maturities. As the size of the forward book grows, tenors of buy-swell swaps have been increasing to one year to avoid bunching up of rollovers,” he said. RBI is expected to have built up forward positions totalling $80 billion over the last few months.

As the dollar strengthened over this period, currencies have fallen worldwide, and the rupee is no exception. While RBI has been selling dollars over the past six months to prevent excessive rupee volatility, this has deprived the system of liquidity, by sucking out rupees. Core liquidity fell from ₹4.79 trillion at the end of September to ₹64,000 crore at the end of December. According to Kanika Pasricha, chief economic advisor at Union Bank of India, ₹3.8 trillion was taken away due to RBI’s intervention in the forex market to stem the rupee’s fall. The rupee fell from 83.80 to the dollar at the end of September to 85.61 end of December.

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Later, the RBI stepped in to support rupee liquidity by reducing the cash reserve ratio (CRR), bringing ₹1.16 trillion into the system. The central bank also infused ₹1.5 trillion through open market operations (OMO), 56-day variable rate repo (VRR) auctions and dollar-rupee sell swap auctions. Later in January, RBI doubled OMO purchases to ₹40,000 crore and started daily VRR operations to add more liquidity.

Rupee trend

Meanwhile, the rupee’s Real Effective Exchange Rate (REER) fell to 104.82 in January from 107.13 in December. The REER here is a measure of value of INR against a weighted average of forty currencies divided by an index of costs. The fall in REER means the average price gap between the same basket of goods in India relative to that in 40 countries declined from 7.13% to 4.8%. It also means the rupee’s overvaluation in relation to the basket of 40 currencies fell by 2.3 percentage points.

“With the rupee showing sharper depreciation pressure vis-a-vis global forex peers since the start of 2025, driving a slip in REER overvaluation, the indirect effect of FX-related factors on liquidity has probably risen further to above ₹5 trillion, in our view. This is apart from seasonal currency leakage of close to ₹1.3 trillion expected to rise to ₹2 trillion by the end of the fiscal,” said Pascricha of Union Bank.

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“The overvaluation of the rupee came down because of the depreciation of the nominal exchange rate, and also because of a fall in Indian consumer price inflation in January from the previous month,” said Madan Sabnavis, chief economist at Bank of Baroda. He expects the overvaluation to further decline in the coming months because of a relatively stable rupee and thr decline in inflation.

“I expect a further moderation in REER,” he said.

Indeed, headline inflation, which includes food and fuel prices, declined to 4.3% in January from 5.2% in December.

“When the rupee was at 86.62 at the end of January and dollar index was at 108.37 and CNH ((Chinese Yuan in the offshore market) was at 7.3193, the REER has fallen to 104.83. Considering that CNH has appreciated and dollar index has fallen, rupee is 86.82 which should be a comfortable level for RBI and they would keep rupee between 86-88 till March-25 and ensure that they keep REER lower towards 104-105 levels which would be a comfortable zone for RBi,” said Anil Kumar Bhansali, head of treasury and executive director, Finrex Treasury Advisors LLP.

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