Central bank’s position in forwards of more than one year increased by $9 billion to $49.1 billion, while position in the up to one year forwards increased by $1 billion to $28.5 billion, RBI data release on Tuesday showed.
The forward position for the month of March is likely to breach $100 billion, according to Bloomberg.
“Based on this trajectory, the March position is widely believed to have crossed the $100 billion mark. Such a large forward book constrains the central bank’s ability to deploy spot reserves to defend the currency. This is also reflected in the FX market, where the rupee has been breaching key levels in quick succession in recent weeks,” said Dhiraj Nim, economist and FX strategist at ANZ Bank.
When these short positions mature, RBI will have to sell dollars in exchange for rupee, impacting liquidity. The selling of dollars will also impact RBI’s foreign exchange reserves, which are currently at $698 billion, down from a peak of $729 billion in February.
“Rupee liquidity will be impacted when these positions mature and the rupee would come under pressure. If we remove the $77 billion forward positions from the total forex reserves, we have about nine months of import cover remaining,” said Madhavi Arora, chief economist at Emkay Financial Services.
“Such large short positions start feeding into calculations of the reserves and the spot reserve number loses its credibility. Central banks generally have 10 months of import cover as a general thumb rule failing which the market starts to factor in a weaker currency,” said a foreign banker who did not want to be identified.