Context:
The Reserve Bank of India (RBI) has begun unwinding its short dollar forward positions after a seven-month pause, while infusing rupee liquidity through open market operations (OMOs) to neutralize the liquidity drain. This strategic move coincides with a weakening dollar and stable rupee, allowing the central bank to simultaneously build foreign exchange reserves and maintain surplus banking liquidity.
Key Developments
Short Dollar Forward Position Decline
- Net short dollar forward book (up to 1 year):
↓ to $64.2 billion in March 2025 from $88.75 billion in February. - Including long-term swaps:
↓ to $84.3 billion from $88.75 billion. - Positions are largely in short-term tenors, indicating natural maturity rather than rollovers.
Sterilization via OMOs
- RBI is infusing rupee liquidity through OMOs to offset the drain caused by maturing short dollar positions.
- Despite surplus liquidity, the RBI has conducted OMO purchases worth ₹2.5 trillion in 2025 so far.
- Strategy aligns with RBI’s accommodative stance to ensure banking system liquidity remains ample.
Foreign Exchange Reserve Management
RBI Builds Reserves Amid Dollar Weakness
- RBI is buying dollars in the spot market instead of rolling forward positions.
- This helps manage short positions and replenish forex reserves.
- Total forex reserves stood at $688 billion as of April 25, down from the $705 billion peak in September 2024.
Rupee Performance and Market Trends
Rupee Strengthens Against the Dollar
- Rupee appreciated by 4.38% since its all-time low of ₹87.95/$ on Feb 10, 2025.
- Current exchange rate: ₹84.26/$ (May 5), appreciating 29 paise from the previous session.
- YTD appreciation:
- 1.61% in calendar year 2025
- 1.44% in financial year 2025–26
Favorable External Factors
- Falling crude oil prices and weakening dollar index support rupee appreciation.
- Strengthening of Asian emerging market currencies adds to positive sentiment.
The RBI’s current strategy reflects a dynamic and proactive approach to managing foreign exchange exposure and banking system liquidity. By allowing short positions to mature, purchasing spot dollars, and sterilizing liquidity through OMOs, the central bank is reinforcing its accommodative stance while bolstering forex reserves amid a stable external environment.
