The Reserve Bank of India's (RBI) net short position of $239 billion in the forward foreign exchange market could limit the rupee's appreciation despite a recovery in foreign portfolio investment inflows, according to a report by IDFC First Bank Economic Research.
The report said the central bank's forward book stood at a net dollar short position of $239 billion as of September 2026, reflecting its commitment to provide dollars when outstanding buy-sell swap arrangements mature.
As capital inflows improve, the RBI would need to accumulate dollars to meet these future obligations, potentially absorbing inflows that might otherwise support the domestic currency.
"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 USD/INR," the report stated.
๐๐ผ๐ฟ๐๐ฎ๐ฟ๐ฑ ๐ฏ๐ผ๐ผ๐ธ ๐ฐ๐ฟ๐ฒ๐ฎ๐๐ฒ๐ ๐ฐ๐ผ๐ป๐๐๐ฟ๐ฎ๐ถ๐ป๐๐
According to the report, approximately $40 billion of the RBI's forward dollar short position is scheduled to mature within one year, while $56 billion will mature over one to three years.
The remaining $143 billion is due to mature within three to five years, with longer-duration commitments largely associated with the Foreign Currency Non-Resident Bank, or FCNR(B), scheme.
The report noted that the substantial forward position also restricts the RBI's ability to sell dollars in the spot market to support the rupee.
This is because the central bank's capacity to offset the liquidity impact of such interventions through additional buy-sell swaps is constrained by its existing commitments.
As a result, the report expects the RBI to focus on gradually reducing its forward book over the coming years.
๐ฅ๐๐ฝ๐ฒ๐ฒ ๐บ๐ฎ๐ ๐๐ฒ๐ฒ ๐ป๐ฒ๐ฎ๐ฟ-๐๐ฒ๐ฟ๐บ ๐ฟ๐ฒ๐ฐ๐ผ๐๐ฒ๐ฟ๐
IDFC First Bank said the rupee could witness some appreciation in the near term if geopolitical tensions between the United States and Iran ease further and American artificial intelligence stocks undergo a correction.
A recovery in foreign portfolio investor inflows during November has also improved sentiment towards Indian financial markets.
However, the report cautioned that competition from the United States for global capital and elevated US Treasury yields could prevent a sustained strengthening of the Indian currency.
The bank projected the rupee to trade between 92 and 94 against the US dollar by December 2026.
It expects the domestic currency to weaken to 94โ95 per dollar by March 2027 and reach approximately 96 by June 2027.
These projections reflect the bank's assessment of external financial conditions, capital flows and the RBI's foreign exchange commitments.
๐๐ ๐๐ฒ๐ฟ๐ป๐ฎ๐น ๐ฏ๐ฎ๐น๐ฎ๐ป๐ฐ๐ฒ๐ ๐๐ป๐ฑ๐ฒ๐ฟ ๐ฝ๐ฟ๐ฒ๐๐๐๐ฟ๐ฒ
The report highlighted vulnerabilities in India's external balances despite a headline balance of payments (BoP) surplus.
India's BoP was estimated to be tracking a surplus of $65 billion during the first half of FY27.
However, excluding inflows generated through the RBI's special swap windows, the underlying balance of payments would have recorded a deficit of approximately $85 billion, the report said.
The RBI's FCNR(B), external commercial borrowing and overseas foreign currency borrowing swap facilities have collectively attracted around $150 billion.
These inflows represent borrowed foreign currency resources that will eventually need to be repaid over a period of three to five years.
The report warned that the repayment obligations could constrain the central bank's flexibility in managing foreign exchange reserves and currency market volatility.
๐จ๐ป๐ฒ๐ป๐ฐ๐๐บ๐ฏ๐ฒ๐ฟ๐ฒ๐ฑ ๐ฟ๐ฒ๐๐ฒ๐ฟ๐๐ฒ๐ ๐ฑ๐ฒ๐ฐ๐น๐ถ๐ป๐ฒ
IDFC First Bank also drew attention to a reduction in India's unencumbered foreign exchange reserves, calculated after excluding the RBI's forward commitments.
According to the report, import cover based on this measure declined to approximately seven months in October 2026, compared with 10 months a year earlier.
The reduction suggests that a smaller proportion of the country's reserve resources is available without corresponding future foreign exchange obligations.
Meanwhile, the RBI has introduced measures to reduce immediate dollar demand, including a special foreign exchange window for oil marketing companies and the Foreign Exchange Risk Reserve (FERR) mechanism for importers.
These measures have helped ease pressure on the spot foreign exchange market.
The report said the gap between client forward dollar purchases and sales narrowed to $17 billion in October, the lowest level in 12 months, compared with $197 billion during the first seven months of FY27.
However, it cautioned that importers could increase their hedging activity if expectations of further rupee depreciation persist.
๐ฅ๐ฎ๐๐ฒ ๐ต๐ถ๐ธ๐ฒ๐ ๐ฎ๐ป๐ฑ ๐ผ๐ถ๐น ๐ฝ๐ฟ๐ถ๐ฐ๐ฒ ๐ผ๐๐๐น๐ผ๐ผ๐ธ
The report said the improvement in the near-term currency outlook had reduced the need for an aggressive interest rate response from the RBI.
Nevertheless, IDFC First Bank expects the central bank to raise policy rates by 25 basis points each in December 2026 and February 2027, followed by a possible final increase of 25 basis points in April.
On crude oil, the report projected India's import basket to average around $85 per barrel during the remaining months of FY27, compared with approximately $102 per barrel during the first seven months of the financial year.
It added that a possible agreement between the United States and Iran could lead to a sharper decline in global crude oil prices, easing India's import bill and providing additional support to the rupee.
The report concluded that while improved capital inflows and lower oil prices could offer temporary relief, the RBI's substantial forward dollar obligations would remain an important constraint on sustained currency appreciation.