Article Summary

• RBI increases dollar short positions in offshore derivatives market.
• Central bank's increased dollar exposure reflects its efforts to support the rupee.
• Analysis suggests a controlled, gradual depreciation of the rupee in the future.
• Limited central bank intervention to prevent the rupee from surpassing a record low.

Recent data indicates that the Reserve Bank of India (RBI) increased its net dollar short positions in the forward market in September, the first such increase in seven months. This move comes amidst the central bank's efforts to curb the ongoing depreciation of the Indian rupee.

According to Bloomberg calculations based on RBI data, the net dollar short positions – representing the volume of dollars the bank has committed to sell in the future at predetermined prices – increased by $6 billion to $59.4 billion.

Dhiraj Nim, a foreign exchange strategist at Australia and New Zealand Banking Group (ANZ) in Mumbai, stated that the increase in forward positions "indicates that the RBI does not want speculative positions to build up in the absence of any fundamental changes in the rupee." Nim expects the central bank to allow the rupee to "depreciate in a controlled and gradual manner" in the future.

Bloomberg News reported earlier in October that the RBI had intensified its interventions in the offshore markets, a shift from its previous policy of reducing such operations over the past few months.

Traders noted last month that the RBI's actions demonstrated its willingness to allow some flexibility in the exchange rate, but it would still intervene when necessary to curb any speculative bets.

Meanwhile, Poonam Gupta, Deputy Governor of the RBI, stated last week that the central bank does not consider a weaker exchange rate to be a policy tool for gaining competitiveness amidst global trade tensions.

RBI data shows that the central bank's net short positions with a maturity of no more than one month rose in September to $16.5 billion, compared to $5.9 billion in the previous month.

On Monday, the rupee fell for the third consecutive day, reaching 88.7988 against the dollar, a level close to its historic low. The support provided by recent RBI interventions appears to be limited for this currency, which is considered the worst-performing in Asia this year. Traders indicated that the RBI's interventions were not limited to the forward market but also included selling dollars in the spot market to support the rupee.

Traders familiar with the matter mentioned that monetary authorities had been selling dollars in small quantities in recent days to prevent the rupee from surpassing its historic low of 88.8050 rupees against the dollar. They noted that the size of the intervention was relatively small compared to the large-scale dollar sales seen last month.

The rupee faces pressure due to uncertainty over tariffs facing Indian exports to the United States, as well as the uncertain path of interest rate cuts by the US Federal Reserve. Despite RBI interventions, the rupee still faces significant depreciation pressure. Sakshi Gupta, a senior economist at HDFC Bank Ltd., stated that "the short dollar story is pretty much over."