Daijiworld Media Network - Mumbai

Mumbai, Nov 9: The Reserve Bank of India's (RBI) net short position of $239 billion in the forward foreign exchange market is likely to limit the rupee's appreciation despite a recovery in foreign portfolio investor (FPI) inflows, according to an economic research report by IDFC First Bank.

The RBI's forward book stood at a net dollar short position of $239 billion as of September 2026, reflecting its commitment to provide dollars when buy-sell swap transactions mature. The central bank will consequently need to accumulate dollars as capital inflows improve, limiting the extent of any appreciation in the rupee, the report said.

Of the total short position, around $40 billion is due to mature within a year, while $56 billion is scheduled to mature in one to three years. The remaining $143 billion is spread across three to five years, with the longer-duration positions largely linked to the Foreign Currency Non-Resident (Bank) or FCNR (B) scheme.

"The large negative forward book implies that the RBI will need to accumulate dollars in order to meet the commitments when these buy-sell swaps mature. Hence, any improvement in capital inflows will be absorbed by the RBI, limiting the downward move in $/INR," the report said.

The substantial forward position also restricts the RBI's ability to sell dollars in the spot market, as its capacity to offset such sales through additional buy-sell swaps is limited. The central bank is therefore expected to focus on gradually reducing its forward book over the next few years.

The report said the rupee could strengthen in the near term if tensions between the United States and Iran ease further and American artificial intelligence stocks undergo a correction. The improvement in foreign portfolio investment inflows during November has also supported investor sentiment towards India.

However, competition from the United States for global capital and elevated US Treasury yields are likely to restrict sustained gains in the domestic currency.

IDFC First Bank expects the rupee to trade in the range of Rs 92-94 against the US dollar by December 2026. It projects a further weakening to Rs 94-95 by March 2027 and a possible slide to Rs 96 by June 2027.

Highlighting pressure on India's external balances, the report said the country's balance of payments was tracking a surplus of $65 billion in the first half of FY27. However, without the RBI's swap windows, the underlying balance of payments would have recorded a deficit of $85 billion.

The central bank's swap windows for FCNR (B) deposits, external commercial borrowings and overseas foreign currency borrowings have attracted cumulative inflows of $150 billion. These funds represent borrowed dollars that will have to be repaid over the next three to five years.

The report also flagged a decline in India's unencumbered foreign exchange reserves, which exclude the forward book. The import cover based on these reserves fell to around seven months in October 2026, compared with 10 months a year earlier.

Meanwhile, RBI measures aimed at curbing dollar demand, including a special window for oil marketing companies and the Foreign Exchange Risk Reserve (FERR) facility for importers, have helped ease pressure in the spot market.

The gap between client forward dollar purchases and sales fell to $17 billion in October, its lowest level in 12 months, compared with $197 billion during the first seven months of FY27. However, the report cautioned that importer hedging demand could rise again if expectations of further rupee depreciation persist.

The improved currency outlook has also reduced the need for an aggressive interest-rate defence. IDFC First Bank expects the RBI to raise interest rates by 0.25 percentage points each in December and February, with a possible final hike of 0.25 percentage points in April.

The report further projected that India's crude oil basket would average around $85 per barrel during the remaining months of FY27, compared with $102 per barrel in the first seven months. A possible agreement between the United States and Iran could trigger a sharper correction in crude prices, providing additional support to the rupee.