Rupee’s oil-led rally faces headwinds as RBI FX forward shorts near $110 billion and banks hedge deposit interest

The Reserve Bank of India’s short-dollar forward position has risen to nearly $110 billion, an all-time high, largely via dollar-rupee swaps that absorb banks’ foreign-currency inflows and hedging needs for state-run firms’ external borrowings. Banks are also expected to add demand for forward dollar purchases to hedge interest payments on around $50 billion of foreign-currency deposits, which would require nearly $12 billion in hedges based on a 6% annual rate over an average four-year maturity. Together, these flows are likely to soak up dollars that might otherwise enter the market as oil prices fall, limiting further rupee gains beyond its rebound from near 97 to 94.50. The RBI’s efforts to rebuild FX reserves while managing its forward book are also expected to cap the currency’s upside, according to bankers and analysts cited in the report.