RBI's Rupee Defence Nears $100 Billion as Currency Hits Record Low

Reserve Bank of India (RBI) Intervenes Heavily in Foreign Exchange Markets

The RBI has significantly increased its use of non-deliverable forwards (NDFs) to defend the rupee, which has weakened to an all-time low against the dollar. According to individuals familiar with the matter, the central bank's net-short dollar book is nearing $100 billion across offshore and onshore markets.

This buildup comes as emerging markets face renewed pressure from a resurgent dollar. The RBI has been intervening heavily in the foreign exchange market for several months, particularly through NDFs, which account for a significant share of its derivatives book. The central bank has been selling dollars largely via short-dated contracts, typically maturing within weeks to a month, and supplementing this with buy-sell swaps, including longer-tenor trades exceeding a year.

India's FX Reserves Reach Near-Record High

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India's foreign exchange reserves stood at $717 billion in the week of March 6, near a record high. The RBI's use of NDFs allows it to influence the exchange rate without immediately depleting foreign-exchange reserves, while also keeping intervention costs relatively lower.

Potential Headwinds Ahead

However, the growing derivatives book may become a headwind for the rupee. As contracts mature, they create recurring demand for dollars, which, alongside steady importer demand, could limit any sustained recovery in the rupee. The rupee has marked successive record lows in March, breaching the closely watched 92-per-dollar level.