RBI’s record $77.5 billion short positions may impact rupee liquidity and forex reserves

However, the trading position would impact the market’s view on how much it could erode future foreign exchange reserves, experts said.

RBI’s net short positions in the forward book reached a record high of $77.5 billion as of January 31, with the majority of positions in the three-month to one-year tenure at $30.6 billion, central bank data showed. The RBI also did two dollar-rupee buy-sell swaps in February – $5 billion for a six-month tenure and $10 billion for a three-year tenure.

“RBI’s short positions have become quite large and they will have to manage this by increasing the maturity of these positions. They will also have to prevent it from maturing because right now the RBI can’t reduce the forward book as it will drain banking system liquidity,” said Gaura Sengupta, chief economist at IDFC First Bank.

When short positions mature, the central bank will have to sell dollars in exchange for rupees, impacting rupee liquidity. The selling of dollars will also impact the RBI’s foreign exchange reserves which are currently at $640 billion, down from a peak of $704 billion in late September last year. The import cover of the current foreign exchange reserves is a little over 10 months.

“The import cover of the current spot foreign exchange reserves stands at about 10-and-a-half months, but if you consider the size of the forward book then this import cover falls to just above nine months,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.While the central bank may manage currency and liquidity with positions in the non-deliverable forward market, investors will begin to factor that into foreign exchange reserves.”At some point, these short positions will start feeding into calculations of the reserves and the spot reserve number will lose its credibility. Central banks need to have 10 months of import cover as a general thumb rule or else markets start doubting that currency,” said a foreign banker who did not want to be identified. “The RBI will have to roll over the near-term positions that are maturing and they may increase the tenure,” said the foreign banker.