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--Dealers: RBI's FX fwd book now likely comprises more of onshore sales

--Dealers: RBI's net outstanding fwd dlr sales may have risen to $75 bln Jan

--Dealers: RBI's outstanding onshore fwd dlr sales estimated $40 bln Jan-end

 

Informist, Thursday, Feb. 6, 2025

 

By Pratiksha and Pratigya Vajpayee

 

NEW DELHI/MUMBAI - The Reserve Bank of India's already large outstanding sales of forward dollars are likely to have risen even further last month as the central bank continued to sterilise its spot market interventions. The more interesting fact is that the RBI has managed to change the composition of its forward book such that it now represents mostly onshore sales of forward dollars rather than offshore bets, currency traders said.  

 

The RBI's net outstanding forward sales, which comprise offshore non-deliverable forwards as well as onshore forward positions, were last known to be at $67.94 billion at the end of December. This number is estimated to have climbed to as high as $75 billion in January, as the RBI conducted large amounts of buy/sell swaps – buying dollars for immediate delivery and selling them for a future date, dealers said. The central bank doesn't disclose the breakup of its forward positions. 

 

Just two months prior, in November, the RBI's $58.85-billion forward book was said to be packed almost entirely with short positions taken in the offshore NDF market, which was the main arena for the central bank's currency interventions in 2024. Since then, the central bank made two key changes to its strategy, according to currency market players Informist spoke to.  

 

Starting December, the RBI stopped adding to its short bets in the NDF market and even opted to square off rather than roll over its maturing contracts. This was partly a fallout of the fact that the central bank became more tolerant of rupee depreciation. It no longer required the large-scale intervention for which it had earlier relied on the NDF market, and managed currency volatility by selling dollars in the spot market.

 

Since December, the rupee has weakened 3.7?cause of a rising dollar index as US President Donald Trump threatened to slap tariffs on countries running a trade surplus with the world's largest economy. Meanwhile, the RBI also intermittently conducted onshore dollar/rupee buy/sell swaps to neutralise the rupee-drain that its spot dollar sales caused on the banking system.

 

The second strategic change came in January, when the RBI massively stepped up its game in onshore forwards, conducting an estimated $1.5 billion worth of buy/sell swaps almost daily. This was necessitated by a cash crunch in the banking system, made worse by the RBI's spot dollar sales. At times, the central bank likely injected rupee liquidity worth around $2 billion-$3 billion in just a day, dealers said.

 

Banking system liquidity has been in deficit since mid-December, with money market dealers attributing the tightness to the RBI's spot dollar sales in order to soften the rupee's depreciation against the greenback since October. The RBI's daily net liquidity injections – a proxy for the systemic liquidity deficit – averaged around INR 2 trillion in January. The net liquidity injected hit its highest in a year on Jan. 23, at INR 3.16 trillion. Latest RBI data also shows the durable liquidity has slipped into deficit for the first time since July 2019, on Jan. 10.

 

"They (the RBI) have sold a lot of forward contracts since last month to counter the liquidity impact. Near, medium, long, all (forward) contracts have been tapped. That will definitely reflect in their forward book," said a currency dealer at a foreign bank. 

 

The net result is that the RBI's forward book is now estimated to contain outstanding onshore dollar sales worth around $40 billion, with NDF positions contributing the remaining $35 billion. Although this seems like a somewhat even split, it is a sea change from what the RBI's forward book looked like just two months ago. Even under peaceful market conditions, the central bank is said to have around $10 billion-$20 billion worth of NDF bets on the table at any given time, according to currency traders.

 

"I think their (the RBI) NDF book has not been growing, it may have actually gotten smaller. They (RBI) have been squaring off their previous (buy/sell) positions, not rolling them over," said a dealer at another foreign bank. "That leaves their forward book with mostly onshore positions."

 

Due to the central bank's persistent dollar/rupee swaps, the premium on the one-year exact-period dollar/rupee forward contract declined almost 30 bps in January. 

 

In addition to its secondary market transactions, the RBI conducted a $5-billion dollar/rupee buy/sell swap auction on Friday, which would have added to its outstanding forward sales in February. In fact, market participants expect the RBI to announce more long-term swap auctions in the coming days, as its currently announced liquidity measures may not be enough to ease the tight financial conditions.

 

Foreign exchange traders are not sure if the change in the RBI's forward book composition is deliberate or incidental, but are certain that carrying bulk of the positions in the onshore market has advantages for the central bank.

 

In November, there was a growing unease about the exposure that the RBI was piling on its NDF book, that too positioning itself against the tide of a globally strengthening dollar. The fact that NDF positions are cash settled and do not entail actual delivery of dollars allows the RBI to add them by the truckload. But it still faces the possibility of heavy losses.

 

Unlike the onshore market, where the RBI is the mighty regulator, in the offshore market it is as vulnerable as any other player. The onshore market is the RBI's own turf where it has various means to protect its books if things don't go its way.  End

 

US$1 = INR 87.57

 

Edited by Vandana Hingorani

 

 

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