Reserve Bank of India Hits Record Forward Position to Support Rupee

The Reserve Bank of India expanded its net short dollar position in the forward market to a record $136.8 billion in July, an increase of approximately $33.5 billion from June. This surge was driven by a foreign currency non-resident (FCNR) deposits scheme designed to attract dollar inflows from overseas Indians. By August 21, FCNR deposits accounted for $65.4 billion of the $72.8 billion in total inflows mobilized, helping push India's total foreign exchange reserves to a lifetime high of $729.3 billion.

While these measures supported the currency, they created significant forward liabilities, as the central bank must return these dollars as three- to five-year deposits mature. To minimize the selling of spot dollars, the bank prioritized interventions in non-deliverable forward and futures markets. This strategy comes amid a volatile global environment where rising oil prices and inflation concerns have pushed global bond yields to nearly two-decade highs, exacerbated by comments from Federal Reserve Chairman Kevin Warsh.

Despite these pressures, the Indian rupee rose to a two-month high of 94.7988 per dollar on Tuesday, its strongest level since July 1. The central bank achieved this by intervening in onshore and offshore markets through dollar sales. The currency was further bolstered by June quarter GDP growth of 7.8%, which exceeded the central bank's 7% forecast and market expectations of 7.3%.