With the trajectory of the rupee indicating a reversal as crude oil prices plunged amid signs that the US and Iran are nearing a peace deal, the Reserve Bank of India (RBI) seems to be seizing the opportunity to bolster its foreign exchange reserves and manage its large short dollar forward position, dealers said.
Market participants estimated the RBI’s dollar purchases at around $1 billion-$2 billion on Thursday, after the central bank is believed to have absorbed $2 billion-$3 billion from the market on Wednesday.
The Indian unit has gained for five straight sessions, strengthening 1.5 per cent against the dollar. However, its gains were capped as the RBI bought dollars to boost foreign exchange reserves, which have fallen by close to $50 billion since the West Asia conflict started in late February.
On Thursday, the rupee opened weaker after the US Federal Reserve maintained a cautious stance on rate cuts, supporting the dollar globally. However, the local currency recovered through the day as lower crude oil prices and sustained foreign inflows boosted sentiment.
The rupee settled at 94.34 per dollar after touching an intra-day high of 94.17 per dollar, against the previous close of 94.53 per dollar.
The rupee has been among the best-performing Asian currencies in recent weeks, supported by a recovery in portfolio inflows and easing concerns over India’s oil import bill following the decline in crude prices. It has appreciated 0.7 per cent this month. The recent gains have helped the currency register an appreciation of 0.5 per cent so far this quarter.
“The RBI could have bought around $1 billion-$2 billion today (Thursday),” said a dealer at a state-owned bank. “The rupee is not expected to appreciate sharply because of the forward maturities and RBI would use part of the flows to replenish its reserves,” he added.
In the last financial year, the central bank net sold $53.13 billion in the spot market, its largest annual net dollar sale, as it fought to curb volatility in the foreign exchange market. The Indian unit fell close to 10 per cent in FY26.
The intervention was concentrated in periods of heightened currency weakness, with net dollar sales peaking at $11.88 billion in October and $10.02 billion in December. After turning a net buyer in January and February, the RBI reverted to net sales in March, offloading a net $9.76 billion through purchases of $19.89 billion and sales of $29.64 billion.
India’s foreign exchange reserves stood at $681.6 billion as of June 6, down by nearly $47 billion from the record high of around $728.5 billion touched in March, according to RBI data. The decline reflected the central bank’s intervention to smooth volatility in the currency market amid heightened global uncertainty and geopolitical tensions during the period.
At the same time, the RBI has accumulated a sizeable short dollar forward position. Data released by the central bank showed its net short forward book stood at $95.3 billion at the end of April, after touching a record $103.1 billion in March. Dealers estimate the position has since risen further as the RBI continued to intervene in the non-deliverable forwards market.
Of the $95.3 billion net short dollar position at the end of April, $13.52 billion was in one-month contracts, $10.90 billion in one-to-three-month tenures, $20.15 billion was set to mature between three months and one year, and the remaining $50 billion was in contracts with maturities of more than one year.
“The RBI is taking the opportunity to buy dollars and add to reserves. At the same time, there is an incentive to reduce dependence on the forward book as contracts come up for maturity,” a dealer at a state-owned bank said.
A sizeable portion of the outstanding forward contracts is due to mature over the coming months.
Market participants expect the RBI to remain an active buyer of dollars during periods of rupee strength. “The RBI is not resisting appreciation, but it is preventing a sharp move. The objective appears to be reserve accretion while managing the forward book,” said a market participant.
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