RBI’s FX forward book and hedging limit Indian rupee’s rally despite lower oil prices

The Indian rupee’s recent recovery is likely constrained by the Reserve Bank of India’s unwinding of its large short-dollar forward book, estimated at nearly $110 billion, up from $96 billion in April.
The forward book expansion is driven by banks passing currency risk from foreign-currency inflows to the RBI via swaps, alongside state-run enterprises hedging external commercial borrowings.
Analysts expect these inflows to be absorbed by the RBI through rebuilding FX reserves, limiting significant appreciation of the rupee despite oil prices falling to three-month lows.
India’s FX reserves have declined from $728.5 billion in March to $681.6 billion, with the RBI’s efforts to shrink the forward book requiring dollar purchases or contract maturities.
Hedging of interest obligations on foreign currency deposits, estimated at around $12 billion in forward dollar purchases, is expected to further cap the rupee’s upside.
This hedging demand is likely to steepen the forward curve as banks seek to cover longer-term interest payments, while shorter-term tenors remain stable amid ample liquidity.