Source: BS
Context:
The Reserve Bank of India’s (RBI) aggressive intervention in the forex market to defend the rupee is reducing liquidity in the banking system, raising concerns among economists and traders about its impact on interest rates and economic growth.
Key Highlights:
- Forward Book Position:
- RBI’s net short position in FX forwards and futures stood at $59.4 billion as of September-end.
- Indicates continued sales of U.S. dollars in the forward market to support the rupee.
- Data on the forward book is released with a one-month lag.
- Market Instruments:
- The FX forward book includes positions in both non-deliverable forwards (NDF) and onshore forward markets.
- The forward book had previously peaked in February 2025 before moderating over the next few months.
- Purpose of Intervention:
- To curb rupee volatility and contain speculative pressures.
- Helps reduce liquidity drain in the banking system compared to spot market dollar sales.
- According to Gaura Sen Gupta, Chief Economist at IDFC First Bank, this strategy allows RBI to defend the rupee “without tightening domestic liquidity too sharply.”
Rupee Movement and Market Context:
- The rupee weakened for the fifth consecutive month in September, touching a record low of ₹88.80 per U.S. dollar.
- Depreciation pressures were linked to:
- Gold import-related outflows,
- Foreign portfolio investor (FPI) withdrawals, and
- Concerns over potential U.S. trade tariffs on Indian goods.
- Despite RBI’s intervention, the rupee continued to hover around ₹88.76 per dollar in early November, close to its record low.
