The RBI’s net outstanding forward book – it represents proprietary dollar sales or purchases for a future date – turned negative in October. Mint Road is obligated to sell $14.6 billion dollars, latest data showed. The last time the forward book was in negative zone was in July 2020.
The decline in the forward book shows the RBI’s shift away from spot market interventions to other segments as it seeks to shield the rupee from excessive volatility amid global currency market swings. Analysts said the forward interventions could also have been driven by the RBI’s desire to ensure the headline forex reserves do not fall too much, as the chest of reserves has played a major role in discouraging speculation against rupee.
“Indeed, in spot market RBI net sold only $0.3 billion in October, which masks large gross dollar sales of $37 billion and gross dollar purchase of $36.7 billion. RBI’s FX intervention behaviour is aimed at limiting volatility in Indian rupee and preserving FX reserves,” said Gaura Sengupta, economist, IDFC First Bank.
Currency traders said that the swap transactions which brought RBI’s forward book down in October have likely continued since then. Dollar sales are employed when the rupee faces depreciation against US currency. Over the past couple of months, the rupee has hovered near record lows.
In September, the net outstanding forward book was positive by $4.6 billion, implying the RBI had pledged to purchase that sum. The central bank’s net dollar sales in spot market clocked in at a lower $310 million in October. The headline forex reserves, which do not factor in forward book, were at $586.11 billion at end October.
Liquidity ConditionsThe RBI’s preference for forward dollar interventions suggests that the central bank is keeping in mind prevailing tight liquidity conditions in banking system, which have pushed up overnight borrowing costs well past the benchmark policy repo rate.
When the RBI sells dollars in the foreign exchange spot market, it drains out rupee liquidity from banking system, leaving lenders with fewer funds. Forward market interventions have a delayed impact on liquidity, with the central bank also having the option to roll over positions.
“There are a number of advantages of using forwards or derivatives. One thing is that it does not impact the reserves and second it doesn’t impact the liquidity. The RBI has telegraphed that spot market interventions will be used with due consideration given to liquidity situation,” said Kotak Securities’ vice-president for currency derivatives, Anindya Banerjee.