RBI’s Short USD/INR Forward Book: A Strategic Lever for Rupee Stability Amid Global Volatility

The Reserve Bank of India (RBI) has long navigated the delicate balance between currency stability and macroeconomic resilience. In 2025, its management of the short USD/INR forward book has emerged as a critical tool in this endeavor. By August 2025, the forward book had shrunk to $60 billion, down from a record $88.7 billion in February [1], reflecting a strategic recalibration to mitigate liquidity risks while preserving foreign exchange (FX) reserves. This adjustment underscores the RBI’s evolving approach to managing the rupee amid global volatility, including U.S. trade tariffs and delayed Federal Reserve rate cuts [5].

Strategic Adjustments and Market Dynamics

The RBI’s forward book, which represents contracts to sell dollars at future dates, serves dual purposes: absorbing dollar inflows and signaling policy resolve to curb excessive rupee depreciation. The reduction in the forward book—from a peak of $89 billion to $60 billion—indicates a measured unwinding of prior aggressive interventions [1]. This shift aligns with the central bank’s broader strategy to normalize liquidity conditions, as evidenced by its focus on extending the maturity of forward contracts to three-month to one-year tenors [4]. By doing so, the RBI reduces short-term pressures on its FX reserves while maintaining flexibility to intervene in the spot market when necessary [5].

However, the forward book remains a drag on the rupee. Analysts project further depreciation to 86.50-87.50 per dollar by year-end, as maturing short positions require the RBI to purchase dollars, exerting downward pressure on the currency [6]. This dynamic highlights the inherent tension between stabilizing the rupee and preserving FX reserves. For instance, the RBI’s $5 billion forex swap intervention in August 2025—a mix of spot and forward transactions—demonstrated its willingness to absorb liquidity shocks without depleting reserves [2]. Such interventions, while effective in the short term, introduce volatility for investors navigating rupee-linked portfolios.

Capital Flows and Reserve Management

The RBI’s forward book adjustments have direct implications for capital flows and FX reserves. A leaner forward book, combined with rising reserves (now approaching $700 billion [5]), provides the central bank with greater capacity to sterilize dollar inflows and outflows. This is particularly crucial as foreign portfolio investors (FPIs) have turned net sellers in Indian equities, exacerbating capital outflows [1]. The RBI’s ability to manage these flows without over-relying on reserves is a testament to its strategic foresight. For example, the central bank has shifted focus to onshore forward contracts, reducing dependence on non-deliverable forwards (NDFs), which are prone to volatility due to their frequent rollover requirements [4].

Yet challenges persist. With $14.7 billion in maturing short positions expected through July 2025, the RBI must balance market stability with reserve preservation [3]. A full reversal of forex swaps, such as the $5 billion maturity in August, could amplify rupee depreciation, particularly if FPI outflows persist [2]. Conversely, a partial rollover might allow the RBI to retain liquidity while signaling policy continuity. This duality underscores the central bank’s role as both a stabilizer and a liquidity provider in a high-volatility environment.

Investment Implications for Emerging Markets

For investors, the RBI’s forward book strategy reshapes risk-return profiles in emerging market assets. A weaker rupee benefits export-driven sectors like textiles and pharmaceuticals but increases costs for import-dependent industries such as energy and electronics [2]. Equity investors may favor IT and pharmaceuticals—sectors less sensitive to currency swings—while hedging exposure to oil and gold, which could benefit from a stronger rupee [2].

Fixed-income markets face added complexity. Liquidity injections from forex swaps influence short-term interest rates, potentially delaying rate cuts and impacting bank profitability [2]. Meanwhile, the RBI’s forward book adjustments introduce volatility into the forex market, with sharp rupee movements contingent on whether the central bank rolls over or unwinds its short-dollar positions [2].

Conclusion

The RBI’s management of the short USD/INR forward book exemplifies the nuanced interplay between central bank intervention and currency risk. By shrinking the forward book and extending maturities, the central bank has enhanced its flexibility to navigate global uncertainties. However, the forward book’s residual drag on the rupee and its impact on capital flows necessitate continued vigilance. For investors, the key lies in aligning strategies with the RBI’s evolving playbook, balancing sectoral exposure and hedging against currency volatility. In a world of persistent macroeconomic turbulence, the RBI’s forward book remains both a shield and a sword—a strategic lever for rupee stability.

Source:
[1] RBI's short USD/INR forward book remains stable- analysis [https://www.investing.com/news/forex-news/rbis-short-usdinr-forward-book-remains-stable-analysis-93CH-4217611]
[2] RBI's $5 Billion Intervention: How India's Forex Policy [https://www.kotaksecurities.com/news/market-news/rbi-5-billion-intervention-india-forex-policy-shift/]
[3] India's $700 billion plus FX reserve pile, leaner forward book bolster rupee shield [https://www.reuters.com/world/india/indias-rising-fx-reserves-leaner-forward-book-bolster-rupee-shield-2025-07-04/]
[4] RBI cuts short forex derivative book to $65.2 billion [https://m.economictimes.com/markets/forex/forex-news/rbi-cuts-short-forex-derivative-book-to-65-2-billion/articleshow/122162891.cms]
[5] India's rising FX reserves, leaner forward book bolster rupee shield [https://cfo.economictimes.indiatimes.com/news/economy/indias-rising-fx-reserves-leaner-forward-book-bolster-rupee-shield/122241962]
[6] A $73 billion short book is putting pressure on rupee [https://m.economictimes.com/markets/forex/an-84-billion-short-book-is-putting-pressure-on-indias-rupee/articleshow/121560952.cms]