RBI dollar buys cap rupee as $110bn forward book grows

Rupee gains meet a familiar ceiling

The Indian rupee’s recent rally, helped by a fall in crude oil prices, is running into a policy-driven constraint: dollar buying by the Reserve Bank of India (RBI). Dealers said the central bank is using the currency’s strength to replenish foreign exchange reserves and to manage its large short dollar forward position. Market participants also pointed to the RBI’s intent to prevent sharp one-way moves even if it does not resist gradual appreciation. This has kept the rupee’s upside limited during periods of strong inflows or supportive global cues. The latest moves come against a backdrop of volatile oil prices and shifting risk sentiment linked to West Asia.

What dealers saw in the spot market this week

Dealers estimated the RBI bought around $1 billion to $1 billion on Thursday, after it is believed to have absorbed $1 billion to $1 billion from the market on Wednesday. The rupee’s trajectory was described as indicating a reversal as crude prices plunged amid signs the US and Iran were nearing a peace deal. Even as the rupee benefited from lower oil, its gains were capped as the RBI bought dollars to boost reserves. Dealers linked these purchases to a broader strategy of rebuilding buffers and reducing reliance on the forward book as contracts mature. A dealer at a state-owned bank summed up the approach as using the opportunity to buy dollars and add to reserves, while also reducing dependence on the forward book.

FX reserves rebuilding after a sharp drawdown

Dealers said reserves have fallen by close to $10 billion since the West Asia conflict started in late February. That decline has sharpened the RBI’s incentive to buy dollars when market conditions allow. The central bank’s buying during rupee strength helps rebuild “FX buffers” without triggering a disorderly move in the exchange rate. Market participants said the RBI’s objective appears to be reserve accretion while managing the forward book, rather than targeting a specific level for USD/INR. In practical terms, that means the RBI may allow appreciation but step in to smooth sharp moves.

The forward book overhang: from $15.3bn to near $110bn

Alongside reserve management, the RBI is dealing with a sizeable net short dollar forward position. Official data showed the RBI’s net short forward book stood at $15.3 billion at the end of April, after touching a record $103.1 billion in March. Separately, two officials at foreign banks estimated the short-dollar forward book had ballooned to an all-time high of nearly $110 billion, up from $16 billion in April. People familiar with developments also put the net-short dollar book at about $110 billion to $115 billion across onshore and offshore markets, around 16% of total dollar holdings. The consistent message across these estimates is that the forward overhang has become a key factor influencing near-term rupee dynamics.

How unwinding the forward book affects the rupee

Reuters reported on June 18 that the rupee’s rally on lower oil prices is likely to be constrained by two forces: the RBI’s unwinding of its sizable FX forward book and banks’ hedging of interest obligations on foreign currency deposits. Shrinking the forward book can happen through buying dollars in the forward market or letting existing contracts mature. Letting positions mature is equivalent to an outright dollar purchase because the RBI must deliver dollars when the contracts settle. Sakshi Gupta, principal economist at HDFC Bank, said dollar inflows could be used to run down forward book maturities of up to one year, which stood at $14.6 billion as of April 2026. This mechanical demand for dollars, even when the rupee is strong, can limit sharp appreciation.

Offshore NDFs and onshore swaps: the RBI’s toolkit

People familiar with the developments said the RBI has sold offshore dollars largely via short-dated contracts, typically maturing in one to three months. At the same time, it has conducted onshore swaps with maturities of more than a year. These swaps were described as replenishing some of the liquidity drain caused by the RBI’s onshore dollar sales aimed at stabilising the rupee. The RBI’s use of non-deliverable forwards (NDFs), which have grown over the past couple of years, allows it to influence the exchange rate without immediately depleting spot reserves. Goldman Sachs Group Inc. analysts led by Kamakshya Trivedi said the central bank is likely to use any renewed capital flows to unwind its short forward book and rebuild foreign-exchange reserves.

Foreign currency deposits and the hedging channel

A second constraint on rupee gains comes from hedging linked to foreign currency deposits raised by Indian banks. Reuters cited an assumption of deposit inflows of around $10 billion, broadly consistent with estimates from bankers. Applying a 6% annual interest rate over an average maturity of four years, banks would need to hedge nearly $12 billion via forward dollar purchases. That hedging demand can influence both the spot market and forward premiums. The interaction between the RBI’s own forward management and banks’ forward buying can keep the forward curve active even if spot moves are calm.

Measures aimed at stabilising the rupee

The RBI has also used administrative and market measures during periods of stress. On March 27, the central bank instructed lenders to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day, with banks given until April 10 to comply. Separately, amid a falling rupee, the RBI announced a USD 5 billion USD/INR buy and sell swap auction on May 26 to inject long-term liquidity in the banking system. The swap was described as a simple buy/sell foreign exchange swap from the RBI’s side, where a bank sells dollars to the RBI and simultaneously agrees to buy the same amount at the end of the swap period. These steps were reported as part of a package announced to stabilise the rupee.

Key figures at a glance

Market impact: why the rupee’s upside stays limited

The immediate market impact described by dealers is a cap on rupee gains when the currency strengthens quickly, especially during oil-led moves. RBI purchases add dollar demand in the spot market, while forward book maturities create additional effective demand when positions are allowed to roll off. At the same time, banks’ forward purchases to hedge foreign-currency deposit obligations can add to forward market pressure and influence premiums. Market participants quoted in the text said the RBI is not resisting appreciation but is preventing a sharp move, with reserve accretion and forward-book management as the apparent objectives. The combined effect is that supportive factors like lower crude may not translate into uninterrupted rupee appreciation.

Analysis: what the numbers say about RBI priorities

The reported scale of the forward book is large: official data put the net short position at $15.3 billion at end-April, while market-based estimates place it near $110 billion to $115 billion. That makes forward management a central operational task, not a marginal tool. The RBI’s dollar buying during periods of rupee strength lines up with two goals mentioned repeatedly in the text: rebuilding FX buffers after a reported close to $10 billion reserve decline, and lowering dependence on the forward book as contracts mature. The June 18 Reuters report also highlights a structural source of forward demand from banks’ hedging needs, quantified at nearly $12 billion under stated assumptions. Together, these dynamics help explain why spot rallies can slow even when global conditions turn supportive.

Conclusion

Dealers and economists cited in the reports see the RBI using rupee strength to buy dollars, rebuild reserves, and gradually unwind a historically large short-dollar forward book. With forward maturities of $14.6 billion up to one year as of April 2026 and additional forward demand linked to banks’ hedging needs, market participants expect the central bank to remain active during phases of rupee appreciation. The next cues for USD/INR are likely to come from the pace of oil price moves, capital flows, and the RBI’s ongoing choices between letting forward positions mature or actively managing them through the spot and swap markets.