Why is RBI now cutting down its $100 billion short dollar forward position; how will it impact Rupee?

Over the past two years, India’s central bank built one of the world’s largest bearish dollar bets to support a persistently weak rupee. It now faces the challenge of unwinding that position without destabilising the currency market. With a spate of recent measures expected to attract foreign capital, the Reserve Bank of India has started trimming its massive short dollar forward position, a stock of commitments to sell the greenback at a future date. The book had ballooned to a record $106.7 billion in May, as per Bloomberg calculations based on RBI data.

The balancing act lies in the pace and extent of the unwind. Leaving the contracts in place for too long can be costly and prolongs the RBI’s forward exposure, while scaling them back too quickly risks diluting the positive impact fresh overseas inflows would otherwise have on the rupee. A misstep could potentially stoke volatility, complicating the RBI’s currency defence just as a renewed flareup in US-Iran tensions drives oil prices higher.

The conundrum has come up in internal meetings at the central bank, where officials have discussed how to reduce the position, according to people familiar with the developments, who asked not to be identified. The rupee, which strengthened last month following the support measures, has resumed declines in July and remains on track for an unprecedented ninth straight year of losses.


A short dollar forward position is essentially a commitment by the RBI to sell the US currency and buy rupees at a future date. The transactions can ease pressure on the rupee and have the benefit of not immediately depleting foreignexchange reserves. Unwinding the position is the equivalent of buying dollars with rupees, which can return pressure on the Indian currency.

Authorities in Indonesia, Malaysia and elsewhere have also relied on derivatives to manage exchange rates. However, the RBI’s forward book has grown at a “remarkable” pace, faster than is typical even among emerging-market central banks known for heavy intervention, said Rajeswari Sengupta, an associate professor at Indira Gandhi Institute of Development Research.

“A large net short forward position is effectively deferred dollar demand and at some point the RBI will need to buy dollars to settle the forward book — it cannot keep rolling it over forever,” she said.

“This unwinding itself may become a fresh source of rupee depreciation pressure, over and above existing pressures.”

For investors, how quickly the RBI pares the short dollar forward book will also be a gauge of its confidence that the rupee can weather external shocks with less official support. Last year, it reduced the positions by about $35 billion in six months through August while allowing the exchange rate to move more freely than under previous governor Shaktikanta Das’ regime. The rupee weakened 0.8% during the period, making it the only currency in emerging Asia to depreciate against the dollar.

Rupee troubles

India’s central bank intervenes in both the offshore and onshore currency market. It deepened its presence offshore in late 2024, ramping up its trading of nondeliverable forwards to buoy the rupee in the face of a resurgent dollar. Then, punishing US tariffs on India in 2025 and the West Asia war early this year piled further pressure on the rupee, forcing the RBI to keep adding to its forwards book.

Some of that strain eased last month as India relaxed rules for foreign investments in government bonds and cut taxes on debt returns. Sentiment was also boosted by the slump in oil prices after the US and Iran signed an interim peace deal. Seizing on the improved backdrop, the RBI is estimated to have trimmed the offshore portion of its short dollar forward book by $10 billion to $15 billion since mid-June, according to traders familiar with the developments.

But the rupee’s renewed weakness underscores the challenge the RBI is facing. The currency is down 0.8% against the greenback so far in July, after gaining 0.4% last month.