The Reserve Bank of India’s reliance on the forward market to manage the rupee has become increasingly pronounced, with its net outstanding forward dollar sales touching a record $106.6 billion at May-end. The scale of the position underscores how forwards have become central to the central bank’s currency-management strategy amid sustained pressure on the rupee.
The RBI’s net outstanding forward dollar sales rose to a record $106.6 billion at the end of May, having climbed steadily since September 2025 as the central bank sought to contain rupee volatility without running down its foreign exchange reserves too rapidly. Pressure from the tariff war and persistent foreign portfolio outflows was compounded by tensions in West Asia from late February. The rupee has depreciated 11.4% over the past year and closed at 96.57 against the dollar on Friday.
“The RBI’s net short forward book of nearly $106 billion highlights a clear shift in its intervention strategy, with greater reliance on the forward market rather than outright spot dollar sales,” said Kunal Sodhani, treasury head at Shinhan Bank. “The large position suggests the central bank has been actively supplying dollars through forwards and swaps to smooth rupee volatility while preserving foreign exchange reserves.”
A short dollar forward position represents an obligation for the RBI to sell dollars and buy rupees at a future date. Its growing use therefore means the scale of the central bank’s currency intervention is not fully captured by movements in headline foreign exchange reserves.
Over the years, the RBI has moved from predominantly spot-market intervention towards a combination of spot sales, forwards and swaps, with its use of the forward market increasing significantly since 2020 and intensifying between 2022 and 2025.
One reason is the impact of spot intervention on domestic liquidity. When the RBI sells dollars in the spot market and absorbs rupees, it drains liquidity from the banking system. Forward intervention allows it greater flexibility in managing the currency without an immediate liquidity impact.
“The RBI’s spot-market intervention creates more liquidity challenges,” said Madhanvankutty G, chief economist at Canara Bank. Comfortable system liquidity, according to the RBI, is a surplus of around 1% of net demand and time liabilities, or roughly Rs 2.7 lakh crore, he said. “We are not able to maintain that kind of surplus regularly. Moreover, the widened credit-deposit gap limits the RBI’s scope for spot-market intervention, making the forward market its primary tool for now.”
Maturing Contracts
The strategy, however, has created a sizeable future dollar obligation. Of the outstanding forward book, about $28.7 billion is due to mature within three months. This makes the recent pickup in foreign currency inflows particularly important.
Banks had mobilised $17.41 billion through foreign currency non-resident (Bank) deposits under the RBI’s special swap scheme as of July 17, contributing to total inflows of $20.72 billion from measures introduced in June to strengthen the balance of payments and support the rupee. Market participants believe the RBI has absorbed a significant part of these inflows to reduce its short forward exposure.
“The RBI has likely absorbed most of the inflows from its FX measures and reduced its short forward book. This will give it more ammunition to intervene aggressively in future,” said Ritesh Bhansali, deputy CEO at Mecklai Financial Services. The central bank could use the inflows either to pare forward liabilities or rebuild reserves towards the $700-billion mark, he added.
India’s foreign exchange reserves stood at $676 billion as of July 17, down 7.2% from their February-end peak of $728.49 billion. After adjusting for the RBI’s short forward position, the effective reserve cushion is considerably lower. The central bank’s net spot-market dollar sales, meanwhile, stood at $6.1 billion in May, compared with nearly $10 billion in March, underscoring the growing importance of forwards in its intervention strategy.
The large forward book could also influence the rupee’s trajectory even if external pressures ease. As forward positions mature or are unwound, the RBI may need to buy dollars or roll over contracts, potentially limiting the extent of any sharp rupee appreciation.
“The RBI needs to be even more careful in using its resources given the volatility,” said Indranil Pan, chief economist at YES Bank. Expected capital inflows should help rebuild reserves and unwind some short positions, strengthening the RBI’s intervention capacity, he said. YES Bank expects the rupee at 97-97.50 to the dollar by March 2027.